Tinbergen Rule Research Articles

Should fiscal equalisation and regional policy goals and tools be disentangled?

ABSTRACT We exploit the mixture of policy goals and instruments of the Spanish regional funding system (RFS) to test whether equalisation transfers impact regional convergence. Using fixed effects and two-stage least squared estimation with instrumental variables (2SLS-IV) models and data for 15 regions for the period 2002–18, we find that both fiscal equalisation and regional transfers show a significant concave convergence-promoting effect, which is larger for regional transfers. However, funding excess/deficit caused by overlapping tools and objectives in the RFS does not have a significant relationship with regional convergence. These results are in line with the Tinbergen rule, since it is more cost-effective to promote regional convergence through regional policy funds.

Is There a Trade-off Between Sustainability and Competition Goals in Public Procurement? Evidence from Slovenia

Over the past decade, public procurement goals have expanded from obtaining free competition and lowest prices to achieving objectives of “horizontal” policies that take into account ecological and social aspects. However, the Tinbergen Rule states that one instrument should be matched with one goal, while using one instrument for achieving multiple goals would undermine its effectiveness. In this paper, we will examine whether implementation of “horizontal” public procurement policies related to green public procurement, socially responsible public procurement and the promotion of micro, small and medium enterprises’ participation affect achievement of the “primary” public procurement goal of free competition. Our study is based on empirical data on more than 65,000 public procurements carried out in Slovenia during the period 2016-2019.

The policy plan of ecotourism development of Sakjan Lake for economic empowerment of buffering rural community in the Meru Betiri National Park Jember Indonesia

Meru Betiri National Park is a conservation area for the biodiversity of flora and fauna. In the implementation, conservation activities should provide economic benefits for the buffer community to build participation in conservation activities. This study aims to find out a policy plan for developing the ecotourism destination of Sakjan Lake in Meru Betiri National Park Jember. The analysis uses the Tinbergen Rule with consideration of endogenous and exogenous variables in achieving the final goal of community empowerment of buffer villages without neglecting the nature conservation in the Meru Betiri National Park. The results show that policy plans consist of zoning changes to the location of Sakjan Lake, maximum protection of natural preservation, tourist safety, community empowerment with a participatory approach, keeping off ecotourism paradoxes and determining a proper strategy for ecotourism development. Ecotourism activities of Sakjan Lake should be directed to the economic improvement of the local community without breaking the regulation related to the existence of Meru Betiri National Park and safety attention for visitors, so that ecotourism activities are not only for income generating but also for nature and environmental conservation.

Weighing Externalities of Economic Recovery Projects: An Alternative to Green Taxonomies that is Fairer and more Realistic

Natural and man-made crises and disasters often cause untold destruction, but also provide multiple opportunities for economic redevelopment post the crisis. Like other crises the COVID-19 pandemic has spurred public and private entities to become engaged in significant redevelopment efforts. Policymakers in some countries view these efforts as an opening for not only including other issues such as deficits in infrastructure and the social systems, but also for redefining their political priorities towards a “green economy”. While pursuing various policy objectives at the same time is a prudent undertaking, it seems rather questionable that politicians, under the pressure of ecological activism, would evaluate all crisis policy measures by their effect on environmental outcomes. We are seeing this in the European Union (EU) as it is about to couple its Recovery and Resilience Facility (financed through the “Next Generation EU Recovery Fund”) with its Green Deal. In the U.S., so far, the Build Back Better package and the American Rescue Plan seem to seek separate evaluation schemes for their different policy fields. The aim of this paper is to evaluate the wide-ranging opinions that exist on the intention to make recovery support contingent on ecological effects: For example, there is the classic Tinbergen Rule which states that for each policy target there must be at least one policy tool; thus, if there are fewer tools than targets, then some policy goals will not ultimately be achieved. Likewise, long-term climate change mitigation can only be achieved with long-term policies that consider and weigh out all externalities. Moreover, embarking on long term recovery plans cannot solely be formulated and implemented on ex-ante definitions of ecological impacts. The paper raises the question whether requesting ecological effects from all recovery programs is just and fair. It contrasts the various options of coupling recovery efforts and climate mitigation with state-of-the-art approaches of valuating multiple externalities: weighing the diverse externalities of policy projects can determine which policy tools to choose. It also demonstrates the downside of a policy that are solely focuses on granting financial support, if not, a project can effectively meet a pre-specified ecological and energy goal as set up by the EU and which ranks recovery projects according to their arbitrary effect on climate change. A wider scope of decision criteria will produce more effective ways to “build back better”.

Overstraining international climate finance: when conflicts of objectives threaten its success

Purpose Climate finance is regularly not only seen as a tool to efficiently combat global warming but also to solve development problems in the recipient countries and to support the attainment of sustainable development goals. Thereby, conflicts between distributive and allocative objectives arise, which threaten the overall performance of such transfer schemes. Given the severity of the climate change problem, this study aims to raise concerns about whether the world can afford climate transfer schemes that do not focus on prevention of (and adaptation to) climate change but might be considered as a vehicle of rent-seeking by many agents. Design/methodology/approach Future designs of international transfer schemes within the framework of the Paris Agreement are to be based on experience gained from existing mechanisms. Therefore, the authors examine different existing schemes using a graphical technique first proposed by David Pearce and describe the conflicts between allocative and distributional goals that arise. Findings In line with the famous Tinbergen rule, the authors argue that other sustainability problems and issues of global fairness should not be primarily addressed by climate finance but should be mainly tackled by other means. Research limitations/implications As there is still ongoing, intense discussion about how the international transfer schemes addressed in Article 6 of the Paris Agreement should be designed, the research will help to sort some of the key arguments. Practical implications There are prominent international documents (like the Paris Agreement and the UN 2030 Agenda for Sustainable Development) seeking to address different goals simultaneously. While synergies between policies is desirable, there are major challenges for policy coordination. Addressing several different goals using fewer policy instruments, for example, will not succeed as the Tinbergen Rule points out. Social implications The integration of co-benefits in the analysis allows for taking into account the social effects of climate policy. As the authors argue, climate finance approaches could become overstrained if policymakers would consider them as tools to also solve local sustainability problems. Originality/value In this paper, the authors will not only examine what can be learnt from the clean development mechanism (CDM) for future schemes under Article 6 of the Paris Agreement but also observe the experiences gained from a non-CDM scheme. So the authors pay attention to the Trust Fund of the Global Environment Facility (GEF) which was established with global benefit orientation, i.e. – unlike the CDM – it was not regarded as an additional goal to support local sustainable development. Yet, despite its disregard of local co-benefits, the authors think that it is of particular importance to include the GEF in the analysis, as some important lessons can be learnt from it.

Should monetary policy lean against the wind in a small-open economy? Revisiting the Tinbergen rule

Abstract While conventional monetary policy maintains its role in counteracting inflation, there are doubts that it is sufficient to guard against the risks of financial instability. It has been debated whether monetary policy should lean against the wind, i.e., if central banks should also respond to the build-up of financial imbalances, such as those associated with unsustainable credit expansion. In the spirit of the Tinbergen rule, some authors have claimed that monetary policy is ineffective in achieving price and financial stability simultaneously. However, others have argued that monetary policy could play a role in taming the credit cycle without compromising its effectiveness to control inflation efficiently. Until now, this analysis has been mostly carried out in a closed-economy setting. I contribute to the debate by showing that targeting the two policy objectives with a single instrument is more costly for a small-open economy than for a closed one. To this end, I develop a small-open economy DSGE model with the Bernanke-Gertler-Gilchrist financial accelerator that features financial frictions and monopolistic competition in goods markets. I then estimate this model for Mexico to explore the policy regimes yielding the lowest welfare cost. My main finding is that the Tinbergen rule is alive and well: Leaning against the wind or augmenting the Taylor rule with an argument on credit growth is not an optimal policy response; instead, the optimal policy mix consists of using two separate tools that focus each on price and financial stability. At the same time, these instruments complement each other to stabilize the economy under financial shocks. Nevertheless, macroprudential measures may not be as useful in helping economic stability under different shocks, particularly when a productivity shock hits the economy. In addition, my model is useful to gauge macroprudential measures effectiveness when discriminating against foreign liabilities. In this regard, I find that macroprudential measures that consider both internal and external debt are more effective than capital controls.

Overstraining International Climate Finance: When Conflicts of Objectives Threaten Its Success

Expectations concerning international climate finance have increased considerably. In particular, provisions for international transfer schemes are an important element in the Paris Agreement. Yet, climate finance is not only seen as a tool to efficiently combat global warming, but also to solve development problems in the recipient countries. Thereby, conflicts between distributive and allocative objectives arise, which threaten overall performance of such transfer schemes. Given the severity of the climate change problem, we raise concerns whether the world can afford climate transfer schemes that do not focus on prevention of (and adaptation to) climate change, but are considered as a vehicle of rent-seeking by many agents. In line with the famous Tinbergen rule we argue that other sustainability problems and issues of global fairness should not be primarily addressed by climate finance but should be mainly tackled by other means. Future designs of international transfer schemes within the framework of the Paris Agreement are to be based on experience gained from existing mechanisms. Therefore, we consider different existing schemes using a graphical technique first proposed by David Pearce and describe the conflicts between allocative and distributional goals that arise.

Uncompensated Care and the Collapse of Hospital Payment Regulation: An Illustration of the Tinbergen Rule

The primary objective of “all-payer” rate setting—regulatory regimes through which states set hospital payment rates for all insurers—was to control costs through consistent, centrally regulated payments. These regimes were often linked, however, to an ancillary goal of financing care for the uninsured. We show that the surcharge mechanism used to achieve this secondary objective decreased the stability of these payment regimes. This instability reflected a feedback loop from surcharge rates to insurance coverage and back to the quantities of uncompensated care in need of financing. Instability was exacerbated when Health Maintenance Organizations were exempted from surcharge collections, creating a regulatory arbitrage opportunity. Legal challenges connected to the incidence of uncompensated care surcharges contributed to the abandonment of all-payer rate regulation by several states. These developments illustrate the wisdom of the Tinbergen Rule, which recommends that independent policy objectives be met with independent policy instruments.

Public spending, credit and natural capital: Does access to capital foster deforestation?

Improving access to man-made capital through domestic credit and public spending is a step towards development. Developing countries rely also on natural capital, which may generate possible conflicts between environment and development targets. Taking the case of land-use and deforestation, this paper revisits the links between man-made and natural capital. Relying on a model of income maximization, we theoretically assess how better access to man-made capital through public spending and credit, influences forest cover loss. Econometric investigations, over the period 2001–2012, show that forest cover loss is positively influenced by credit and public spending. A better access to capital is thus detrimental to the forest. This can be interpreted as a Tinbergen rule: the development objective of facilitating access to man-made capital cannot be tackled without facing the objective of environmental protection.

Macroprudential policy – closing the financial stability gap

PurposeThe global financial crisis demonstrated that monetary policy alone cannot ensure both price and financial stability. According to the Tinbergen (1952) rule, there was a gap in the policymakers’ toolkit for safeguarding financial stability, as the number of available policy instruments was insufficient relative to the number of policy objectives. That gap is now being closed through the creation of new macroprudential policy instruments. Both monetary policy and macroprudential policy have the capacity to influence both price and financial stability objectives. This paper develops a framework for determining how best to assign instruments to objectives.Design/methodology/approachUsing a simplified New-Keynesian model, the authors examine two sets of policy trade-offs, the first concerning the relative effectiveness of monetary and macroprudential policy instruments in achieving price and financial stability objectives and the second concerning trade-offs between macroprudential policy instruments themselves.FindingsThis model shows that regardless of whether the objective is to enhance financial system resilience or to moderate the financial cycle, macroprudential policies are more effective than monetary policy. Likewise, monetary policy is more effective than macroprudential policy in achieving price stability. According to the Mundell (1962) principle of effective market classification, this implies that macroprudential policy instruments should be paired with financial stability objectives, and monetary policy instruments should be paired with the price stability objective. The authors also find a trade-off between the two sets of macroprudential policy instruments, which indicates that failure to moderate the financial cycle would require greater financial system resilience.Originality/valueThe main contribution of the paper is to establish – with the help of a model framework – the relative effectiveness of monetary and macroprudential policies in achieving price and financial stability objectives. By so doing, it provides a rationale for macroprudential policy and it shows how macroprudential policy can unburden monetary policy in leaning against the wind of financial imbalances.

Interaction effects of targeted agri-environmental payments on non-marketed goods and services under climate change in a mountain region

Targeting of agri-environmental measures (AEMs) is a key to increasing the cost-effectiveness of governmental support for biodiversity conservation and the provision of ecosystem services from agriculture. Existing literature, however, often focuses on single measures without considering that policies are usually bundles of different measures addressing multiple non-marketed goods and services. Thus, interaction effects of a set of policies in a given policy mix may influence the cost-effectiveness of single measures. Recently, Swiss agricultural policy was redesigned using the Tinbergen rule as its basis, i.e., a single measure for each policy goal, including additional targeted direct payments. This facilitates testing for interaction effects of multiple targeted AEMs. Here we use a social-ecological, agent-based modelling framework to assess interaction effects of these agricultural policies while accounting for climate change impacts in our analysis. The results from our case study in a mountain region show that ecosystem service provision increases with targeted payments. However, interaction effects of the different targeted policies affect the provision levels of all goods and services. In particular, changes at the extensive margin, i.e., the total amount of land that is under production, largely determine the amount of ecosystem services provided. Thus, climate change driven productivity increases and policies that keep land in production may substantially support the provision of non-marketed goods and services in marginal agricultural production regions with a high potential for land abandonment. Consequently, the effectiveness of targeted policy measures should also consider changes at the extensive margin and be assessed in the context of bundles or portfolios of different policy measures.

Sustainable housing: A ground lease partnership model

Against the background of strained housing markets, economic, social and ecological targets (e.g. energy-based modernization) may conflict with each other. Against this backdrop, municipal leasehold approaches appear to be interesting. Considering the case of Germany, the legislator designed leasehold rights as an instrument to tackle a variety of targets. However, compliance with the Tinbergen rule suggests that municipalities should focus on economic targets while using leasehold approaches. Nonetheless, they should waive any exploitation of their monopolistic position in the local land market in favor of ground leases that are in line with the capital market. In doing so, public leasehold approaches may create an added value which may help to ease the conflicts between social and ecological targets. In this context, social and ecological targets shouldn’t be pursued by the municipality itself, but in cooperation with suitable partners not looking to maximize their risk/return requirements. However, a number of obstacles have to be removed before leasehold rights can be used in this way.

Tinbergen and tipping points: Could some thresholds be policy-induced?

Thresholds and tipping points that are characteristic of dynamic multi-stability are increasingly prominent touchstones of the science-policy interface. Prior economic work has shown thresholds arising in convex-concave ecological models that exclude humans may disappear in models of coupled economic-ecological systems when economic agents are included as part of the system. Less well-understood is how this result may depend on the ability of humans to manage complex systems. We examine the role of institutions that condition the available management choices. We find institutional restrictions do not generate non-convexities when the ecological system is well-behaved, but that these restrictions may generate non-convexities when the ecological system is convex-concave. These results are tied to the concept of path controllability, which is when managers have sufficient controls to guide the system across the state space. Path controllability is the dynamic version of the Tinbergen rule, and generally requires separate controls to manage each possible ecological externality. We link the concepts of ecosystem externalities, thresholds, and path controllability to provide new economic insights into problems with the potential for multi-stability, and we illustrate the importance of institutions for managing convex-concave systems.

Is There a Macroeconomic Trilemma? A Theoretical Analysis

The article examines the view in international macroeconomics that has become known as the ‘Macroeconomic Trilemma’, the ‘Impossible Trilemma’, or simply the ‘Trilemma’. According to this view, national policy makers can reach two out of three desirable states: (i) free capital flows, (ii) exchange rate stability, and (iii) monetary policy autonomy, the latter implying the ability of monetary policy to pursue a production goal. It follows from the Trilemma that national policy makers with a closed capital account, i.e. choosing not to have (i), are both able to reach exchange rate stability and to use monetary policy for the pursuit of a production goal (monetary autonomy), i.e. the two desirable states indicated by (ii) and (iii). The implication is that it will be possible with the use of only one policy instrument, i.e. monetary policy, to reach two policy goals (an exchange rate goal and a production goal). This contradicts the Tinbergen rule, according to which the number of achievable policy goals cannot exceed the number of independent policy instruments. On the basis of a simple macroeconomic framework, the article disproves this part of the Trilemma. Thus, when capital markets are closed, national policy makers can reach only one policy goal – either an exchange rate goal or an employment goal – when they control only one policy instrument, i.e. monetary policy.

The role of multi-target policy instruments in agri-environmental policy mixes

The Tinbergen Rule has been used to criticise multi-target policy instruments for being inefficient. The aim of this paper is to clarify the role of multi-target policy instruments using the case of agri-environmental policy. Employing an analytical linear optimisation model, this paper demonstrates that there is no general contradiction between multi-target policy instruments and the Tinbergen Rule, if multi-target policy instruments are embedded in a policy-mix with a sufficient number of targeted instruments. We show that the relation between cost-effectiveness of the instruments, related to all policy targets, is the key determinant for an economically sound choice of policy instruments. If economies of scope with respect to achieving policy targets are realised, a higher cost-effectiveness of multi-target policy instruments can be achieved. Using the example of organic farming support policy, we discuss several reasons why economies of scope could be realised by multi-target agri-environmental policy instruments.

Target Controllability, Time Consistency, and the Tinbergen Rule

The Tinbergen Rule states that achieving the desired targets requires an equal number of instruments. This paper shows that time inconsistency does not exist in the case of an equal number of instruments and targets. Target uncontrollability and time inconsistency, however, emerge as problems in the case of fewer instruments than targets. In this case, we obtain a necessary and sufficient condition for joint asymptotic controllability of target values. The condition is identical under commitment and under discretion. We observe that the constant average inflation bias comes from fewer instruments than targets, rather than from time inconsistency as the literature stresses. Policy makers must address target uncontrollability before addressing time inconsistency to avoid entanglement of the two problems when addressing time inconsistency. The paper solves both problems by designing the central bank loss function that determines the central bank’s long- and short-run target values of inflation and output as well as the relative weight between stabilizing inflation and output. Intuitively, a proper target value trade-off solves target uncontrollability, whereas a proper relative weight between target stabilizations achieves optimal target variability trade-off and solves time inconsistency. As a result, target values are moderate and controllable, establishing monetary policy credibility. Discretionary policy under the designed loss function, which replicates optimal policy under the social loss function, proves optimal and time-consistent. In addition, we identify two situations where the delegated weight equals the social weight -- one-decision-maker models and static models, providing additional insight into time inconsistency.

Beyond the 'Tinbergen Rule' in Policy Design: Matching Tools and Goals in Policy Portfolios

Existing studies of policy mixes do not use consistent terminology and fail to carefully define the dependent variable of the inquiry. As a result theorization has lagged, the cumulative impact of empirical studies has not been great and understanding of the phenomena, despite many observations of its significance in policy studies, has not improved significantly over the past three decades. This paper continues the process of revitalizing policy design studies by carefully distinguishing between mix types, first drawing a distinction between 'instrument mixes' and 'policy mixes' often glossed in existing studies, and then defining key types and sub-types of both kinds of mixes based on the complexity of design variables such as the number of goals, the number of policies and the number of levels of government involved in the design of a policy portfolio or bundle. The taxonomy helps to assess the validity and applicability of oft-cited design principles such as the Tinbergen Rule and unifies studies of synergistic and counter-productive tool relationships while also providing some insights and promising research directions for future studies of policy formulation and design.

The present state of health economics: a critique and an agenda for the future

A couple of days ago, I was asked to give an interview concerning the conference ECHE 2012, the motto of which was, ‘‘Progress in Health Economics’’. One of the questions posed to me was, ‘‘What is your vision of Health Economics 10 years from now?’’ Here is what I had to say. There are two peculiarities of Health Economics that are of concern to me and that I would like to see addressed in the future. One is the often tenuous relationship of the discipline with general economic theory. Take for instance risk adjustment (RA) in health insurance, which has become an industry of its own in the course of the last 30 years [6]. Health economists invariably seek ways to neutralize the risk selection incentives of health insurers. However, RA payments by health insurers are not borne by them but are shifted to the insured under the guise of increased contributions. The analogy with an indirect tax is evident, and any standard Economics textbook will point out that, while an indirect tax is paid by the sellers of a good, it is effectively borne by the consumers (entirely so in the long run). In the case of RA, the low risks are made to pay a contribution in excess of what is justified in view of their risk profile, while high risks receive an indirect subsidy financed by the low risks. However, the analogy with indirect taxation has two implications. First, as long as RA remains imperfect (i.e., a situation unlike the long-run equilibrium in the case of a good traded on a competitive market), the risk-selection incentives of both the insured and the insurers must be targeted. After all, the low risks have an incentive to seek out a health insurer offering them a favorable deal, permitting them to eschew the indirect tax in form of payment into RA. The high risks do the same, selecting the health insurer offering them a low contribution thanks to a maximum cross-subsidy. This may explain why, at least in Switzerland, the volume of RA has not ceased to increase, contrary to expectations that RA would ‘wither away’ since it neutralizes insurers’ risk selection incentives [2], an expectation reminiscent of government ‘withering away’ in the happy Marxist state. Second, when there are two objectives (neutralizing the incentives for risk selection of the insurer and the insured in a RA context), the Tinbergen rule of economic policy states that two instruments are needed to attain both of them. Therefore, RA is subject to a kind of impossibility theorem precluding a perfect solution. Admittedly, it took me about a decade to recognize this [4]. Without doubt, Health Economics will benefit in the future by reinforcing its ties with general economic theory. The second peculiarity of Health Economics causing concern is its overly close relationship with national institutions and sponsors of research. This occurred to me for the first time during ECHE 1995 in Stockholm. When roaming between sessions, I noticed that there was hardly any overlap between two camps of delegates (this is also reflected in [7]). One camp comes from countries with a National Health Service (NHS). There, the discussion revolves about cost effectiveness, QALYs, and equity. The other camp is rooted in insurance-based countries; its focus is on risk selection and RA, moral hazard effects, and the production of health. Interestingly, the members of the two camps seem to be quite happy to be among themselves, presumably their reunion helping them to present their research to some national sponsor later.... This is an extended version of the Farewell Address by the Honorary Chairman, ECHE 2012 European Conference on Health Economics, 19–21 July 2012 in Zurich.

Modeling a farm population to estimate on-farm compliance costs and environmental effects of a grassland extensification scheme at the regional scale

We used a farm-level modeling approach to estimate on-farm compliance costs and environmental effects of a grassland extensification scheme in the district of Ostprignitz-Ruppin, Germany. The behavior of the regional farm population ( n = 585) consisting of different farm types with different production orientations and grassland types was modeled under the presence and absence of the grassland extensification scheme using the bio-economic model MODAM. Farms were based on available accountancy data and surveyed production data, while information on farm location within the district was derived from a spatial allocation procedure. The reduction in total gross margin per unit area was used to measure on-farm compliance costs. A dimensionless environmental index was used to assess the suitability of the scheme to reduce the risk of nitrate-leaching. Calculated on-farm compliance costs and environmental effects were heterogeneous in space and farm types as a result of different agricultural production and site characteristics. On-farm costs ranged from zero up to almost 1500 Euro/ha. Such high costs occurred only in a very small part of the regional area, whereas the majority of the grassland had low on-farm costs below 50 Euro/ha. Environmental effects were moderate and greater on high-yield than on low-yield grassland. The low effectiveness combined with low on-farm costs in large parts of the region indicates that the scheme is not well targeted. The soft scheme design results from an attempt to achieve environmental and rural development objectives with only one scheme. Improving the efficiency of the scheme would require designing separate instruments for the two distinct objectives. This is in line with the Tinbergen rule, which states that consistent economic policy requires that the number of instruments equals the number of targets.

The Environment, Energy, and the Tinbergen Rule

Higher energy prices and the growing concern about global warming have led to a number of policy goals and targets designed to curb global warming and/or the development of alternative sources of energy. However, the Tinbergen Rule states that for each and every policy target there must be at least one policy tool. If there are fewer tools than targets, then some policy goals will not be achieved. Further complicating the public policy environment are the facts that some policy tools affect more than one target, some tools help achieve more than one target, and others, while meeting one target, make meeting other targets more difficult. Also, some targets are more efficient than others. If policy makers are going to be able to effectively meet their environmental and energy goals, a series of policy tools need to be developed.