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Abstract:
The 1960s were a time of great optimism for macroeconomists. Many economists viewed the business cycle as dead. The Keynesian model was the reigning paradigm and it provided all the necessary instructions for manipulating the levers of monetary and fiscal policy to control aggregate demand. Inflation occurred if aggregate demand was stimulated "excessively" and unemployment arose if demand was "insufficient." The only dilemma faced by policymakers was determining the most desirable location along this inflation-unemployment tradeoff or Phillips curve. The remaining intellectual challenge was to establish coherent microeconomic foundations for the aggregate behavioral relations posited by the Keynesian framework, but this was broadly regarded as a detail that should not deter policymakers in their efforts to "stabilize" the economy.

The return of the business cycle in the 1970s after almost a decade of economic expansion, and the accompanying high rates of inflation, came as a rude awakening for many economists. It became increasingly apparent that the basic Keynesian framework was not the appropriate vehicle for understanding what happens during a business cycle nor did it seem capable of providing the empirically correct answers to questions involving changes in the economic environment or changes in monetary or fiscal policy. The view that Keynesian economics was an empirical success even if it lacked sound theoretical foundations could no longer be taken seriously.

Abstract:
Recent developments in macroeconomic theory emphasize that transient economic fluctuations can arise as responses to changes in long run factors -- in particular, technological improvements -- rather than short run factors. This contrasts with the view that short run fluctuations and shifts in long run trends are largely unrelated. We examine empirically the effect of shifts in stochastic trends that are common to several macroeconomic series. Using a linear time series model related to a VAR, we consider first a system with GNP, consumption and investment with a single common stochastic trend; we then examine this system augmented by money and prices and an additional stochastic trend. Our results suggest that movements in the "real" stochastic trend account for one-half to two-thirds of the variation in postwar U.S. GNP.

Abstract:
As Chairman of the Federal Reserve for the past 18 years, Alan Greenspan deserves praise for his stewardship of monetary policy. He has guided the Fed and monetary policy in a way that has led to low and stable inflation. But if Greenspan's record clearly deserves praise, he could have done more to move monetary policy into the 21st century and prepare the institution for the future.

Greenspan has relied heavily on his personal judgment and has argued repeatedly that the Fed must have extensive flexibility to respond to the economic environment. But if Greenspan's judgment, skill, and luck have served him and the country well, it is dangerous to rely so heavily on the judgment of a single individual. When he departed, he took with him his skill and judgment, as well as his credibility and his personal commitment to low inflation. The Fed he leaves behind has no explicit institutional commitment to long-run price stability.

This article argues that by operating with a set of rules and guidelines, or at a minimum clearly stated institutional objectives, the Fed would eliminate much of the second guessing about what it is doing and why, and the associated volatility in markets. More generally, the benefits of more explicit guidelines for monetary policy include:

- Increasing public understanding of monetary policy, including what it can and cannot do.

- Increasing transparency and accountability. Most organizations have clear goals and we hold their leaders accountable. The Fed is different. The Fed seems to be held accountable for all things economic and thus it is truly accountable for nothing. It never has to explain its actions and what went right or wrong.

- Establishing a clear focus for the Fed regarding its goals and objectives.

- Creating increased confidence that sound monetary policy will be followed in the future.

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No abstract is available for this paper.

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No abstract is available for this paper.

Abstract:
Innovation in financial markets, spurred to a significant extent by developments in finance theory and financial econometrics, has played a critical role in spurring economic growth. However, the current turmoil in financial markets raises fundamental questions about the nature of financial innovation and the role of policymakers in maintaining financial stability. This paper explores these questions, focusing on the complexities of modeling financial risk and the potential trade-off between policies aimed at combating short-run financial instability on the one hand and the potential financial market distortions and moral hazard that can result from such policies on the other.

E32, E44, E50, G18, credit risk modeling, financial innovation, financial stability, monetary policy

Abstract:
The paper extends previous work on the information in the term structure about future real economic growth. For the U.S. and Germany, and to a lesser extent for the U.K., we find evidence that the long end of the term structure has information about future growth of industrial production beyond expectations about future monetary policy. We also find that foreign term structures can forecast domestic low frequency movements in economic activity especially in countries that experience high and variable rates of inflation.

Economic fluctuations, monetary policy