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Abstract:
Realizing that their traditional instruments were inadequate for responding to the crisis that began on 9 August 2007, Federal Reserve officials improvised. Beginning in mid-December 2007, they implemented a series of changes directed at ensuring that liquidity would be distributed to those institutions that needed it most. Conceptually, this meant America's central bankers shifted from focusing solely on the size of their balance sheet, which they use to keep the overnight interbank lending rate close to their chosen target, to manipulating the composition of their assets as well. In this paper, I examine the Federal Reserve's conventional and unconventional responses to the financial crisis of 2007-2008.

Abstract:
Inflation has been low in many countries for at least a decade. But have inflation processes changed in ways that would help make low inflation permanent? Using both aggregate and disaggregated inflation data, we find that the means of inflation processes have become smaller over the past two decades and that, allowing for these changes in the mean, their persistence has not declined much. Changes in monetary policy frameworks and recessions appear to have contributed to a reduction in the mean of inflation, but do not appear to have a meaningful impact on persistence, and there is some evidence that the shifts in inflation expectations are the proximate cause of the changes in the mean of inflation. These findings suggest that policy-makers should focus on maintaining credibility and carefully monitoring inflation expectations for any indication that they are rising.

Abstract:
On 18-19 June 2004, the BIS held a conference on "Understanding Low Inflation and Deflation". This event brought together central bankers, academics and market practitioners to exchange views on this issue (see the conference programme in this document). This paper was presented at the workshop. The views expressed are those of the author(s) and not those of the BIS.

inflation, inflation persistence, Monetary Policy Regimes

Abstract:
On March 11, Stephen G. Cecchetti, Executive Vice President and Director of Research at the Federal Reserve Bank of New York, delivered the following remarks at the symposium A New Equilibrium in the Credit Business: The Future of Financial Systemsâ€"Regulation in the Twenty-First Century, sponsored by the Oliver Wyman Institute and the Institut fur Kreditwesen, Universitat Munster.

Financial Intermediation, Regulation

Abstract:
This paper investigates the statistical properties of the U.S. sacrifice ratio--the cumulative output loss arising from a permanent reduction in inflation. We derive estimates of the sacrifice ratio from three structural VAR models and then conduct Monte Carlo simulations to analyze their sampling distribution. While the point estimates of the sacrifice ratio confirm the results reported in earlier studies, we find that the estimates are very imprecise and that the degree of imprecision increases with the complexity of the model used. That is, increases in the number of structural shocks widen our confidence intervals. We conclude that the estimates provide a very unreliable guide for assessing the output cost of a disinflation policy.

disinflation, identification, vector autoregression, structural shocks

Abstract:
Analysts seeking evidence of rising inflation often focus on the movements of a single indicator - an increase in the price of gold, for example, or a decline in the unemployment rate. But simple statistical tests reveal that such indicators, used in isolation, have very limited predictive power.

inflation, indicators, forecasting

Abstract:
Among the many challenges facing the new Eurosystem - the European Central Bank and the central banks of the eleven members of the European Monetary Union - is the possibility that participating countries will respond differently to interest rate changes. This paper provides evidence that differences in financial structure are the proximate cause for these national asymmetries in monetary policy transmission and that these differences in financial structure are a result of differences in legal structure. The author concludes that unless legal structures are harmonized across Europe, the financial structures and monetary transmission mechanisms of the European Union countries will remain diverse.

interest rates, monetary policy transmission

Abstract:
Among the many challenges facing the new Eurosystem is the possibility that the regions of the euro area will respond differently to interest rate changes. In this essay, I provide evidence that differences in financial structure are the proximate cause for these national asymmetries in the monetary policy transmission mechanism, and that these differences in financial structure are a result of differences in legal structure. My conclusion is that unless legal structures are harmonized across Europe, the financial structures and monetary transmission mechanisms of the European union countries will remain diverse.

Abstract:
Wider use of central counterparties (CCPs) for over-the-counter derivatives has the potential to improve market resilience by lowering counterparty risk and increasing transparency. However, CCPs alone are not sufficient to ensure the resilience and efficiency of derivatives markets.

Abstract:
This paper investigates the use of trimmed-mean estimators and time-series averaging as techniques for improving the signal-to-noise ratio in high-frequency price data. We show that trimmed-mean estimators substantially increase the efficiency of the aggregate estimator compared to the more standard mean-measures. In this way, these estimators also reduce a central bank's need to time-series average the monthly inflation estimates which greatly improves the timeliness of the inflation statistic. In the case of Brazil, we find that asymmetrically trimming 24 percent from the tails of the price-change distribution reduces the RMSE of the monthly inflation statistic as a measure of the inflation trend by 23 percent, making it as accurate as the 3-month average growth rate of the mean retail price measure. We also demonstrate that a 3-month lagged moving average of the optimal (asymmetrically) trimmed mean is as efficient an estimator of the 24-month centered moving-average retail price growth trend as the mean inflation rate averaged over any horizon.

Inflation, Brazil

Abstract:
We argue that there are sound theoretical reasons for believing that an inflation targeting central bank might improve macroeconomic performance by reacting to asset price misalignments over and above the deviation of, say, a two-year ahead inflation forecast from target. In this paper, we first summarize the arguments for our basic proposition. We then discuss some of the counter-arguments. Specifically, we counter those who argue that reacting to asset prices does not improve macroeconomic performance by claiming that they are attacking the 'straw man' under which central bankers react in the same way to all asset price changes. We continue to emphasize that policy reactions to asset price misalignments must be qualitatively different from reactions to asset prices changes driven by fundamentals. Hence, we stand by our earlier results and conclusions. In practice, we do believe that central bankers can detect large misalignments (e.g. the Nikkei in 1989 or the NASDAQ in early 2000), and that they might be in a better position to react to long-lived bubbles than many market participants. However, we recognize that our proposal may present communication challenges, and it is critically important that policy set to react to asset price misalignments both be explained well and that it be based on a broad consensus. It is also important to emphasize that our proposal is wholly consistent with the remit of most inflation-targeting central banks, as we are recommending that while they might react to asset price misalignments, they must not target them.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Over the four years beginning in the summer of 1929, financial markets, labor markets and goods markets all virtually ceased to function. Throughout this, the government policymaking apparatus seemed helpless. Since the end of the Great Depression, macroeconomists have labored diligently in an effort to understand the circumstances that led to the wholesale collapse of the economy. What lessons can we draw from our study of these events? In this essay, I argue that the Federal Reserve played a key role in nearly every policy failure during this period, and so the major lessons learned from the Great Depression concern the function of the central bank and the financial system. In my view, there is now a broad consensus supporting three conclusions. First, the collapse of the finance system could have been stopped if the central bank had properly understood its function as the lender of last resort. Second, deflation played an extremely important role deepening the Depression. And third, the gold standard, as a method for supporting a fixed exchange rate system, was disastrous.

Abstract:
In this article we examine one potential explanation for the cross-country differences in the importance of banks and capital market financing of investment. We provide both an equilibrium model predicting and empirical evidence showing that countries with explicit deposit insurance and a high degree of state-owned bank assets have smaller equity markets, a lower number of publicly traded firms, and a smaller amount of bank credit to the private sector. Finally, our results suggest that the effects of deposit guarantees are more important than the origins of national legal systems. (JEL G21, G22, G32)

Abstract:
Countries around the world differ substantially in the relative importance of their banks and capital markets in providing investment financing. This paper examines one potential explanation for the cross-country differences in the importance of banks and capital market financing of investment. It is our contention that much of the variation across countries in the depth and breadth of capital markets can be explained by a combination of the existence of deposit insurance and the extent to which a country's banking system is state owned. We provide both an equilibrium model predicting and empirical evidence showing that countries with explicit deposit insurance and a high degree of state-owned bank assets have smaller equity markets, a lower number of publicly traded firms and a smaller amount of bank credit to the private sector. Finally, our results suggest that the effects of deposit guarantees are more important than the origins of national legal systems.

Abstract:
No abstract is available for this paper.

Abstract:
Aggregate shocks that move output and inflation in opposite directions create a tradeoff between output and inflation variability, forcing central bankers to make a choice. Differences in the degree of accommodation of shocks lead to disparate variability outcomes, revealing national central banker's relative weight on output and inflation variability in their preferences. We use estimates of the structure of 23 industrialized and developing economies, including nine that target inflation explicitly, together with the realized output and inflation patterns in those countries, to infer the degree of policymakers' inflation variability aversion. Our results suggest that both countries that introduced inflation targeting, and non-targeting European Union countries approaching monetary union, increased their revealed aversion to inflation variability, and likely suffered most increases in output volatility as a result.

Abstract:
The author presents an analytical framework for the formulation of a central bank policy rule and examines some conceptual issues relating to the current debate over the effectiveness of such rules. In discussing the move by many central banks to adopt a price-level or inflation rate target - the basis for one type of rule - he suggests that central banks are implicitly changing the relative importance they attach to the goals of price and output stability. Using 1984-95 data, he shows that an effort to decrease inflation variability modestly could cause output to deviate significantly from its optimal path. The essay also addresses the influence of various types of uncertainty on policymaking, the possible justifications for interest rate smoothing, and the consequences of the fact that nominal interest rates cannot fall below zero.

Monetary policy targets

Abstract:
Over the past twenty years, macroeconomic performance has improved markedly in industrialized and developing countries alike. Both inflation and real growth are more stable now than they were in the 1980s. This stability has been accompanied by dramatic changes in financial structure. We examine the connection between these concurrent events using data from 23 developed and emerging markets countries. There are a number of possible explanations for the widespread improvement in economic outcomes over the past two decades. There is the very real possibility that the world has become a more stable place. Alternatively, monetary policymakers may have become more skillful in carry out their stabilization objectives. That is, the monetary policy of the 1990s may have been more efficient than it was in the 1980s. We provide evidence that policy has in fact improved, suggesting that a rise in the competence of central bankers. But the ability of policymakers to carry out their job depends crucially on their having the tools necessary to reduce inflation and output volatility. The transmission of these interest rate movements to domestic output and prices depends on the structure of the country's banking system and financial markets. We show that a reduction in direct state ownership of banking system assets and the introduction of explicit deposit insurance can help explain the simultaneous improvement in the efficiency of monetary policy and stabilization of the macroeconomy.

Abstract:
The debate over including asset prices in the construction of an inflation statistic has attracted renewed attention in recent years. Virtually all of this (and earlier) work on incorporating asset prices into an aggregate price statistic has been motivated by a presumed, but unidentified transmission mechanism through which asset prices are leading indicators of inflation at the retail level. In this paper, we take an alternative, longer-term perspective on the issue and argue that the exclusion of asset prices introduces an 'excluded goods bias' in the computation of the inflation statistic that is of interest to the monetary authority. We implement this idea using a relatively modern statistical technique, a dynamic factor index. This statistical algorithm allows us to see through the excessively 'noisy' asset price data that have frustrated earlier researchers who have attempted to integrate these prices into an aggregate measure. We find that the failure to include asset prices in the aggregate price statistic has introduced a downward bias in the U.S. Consumer Price Index on the order of magnitude of roughly 1/4 percentage point annually. Of the three broad assets categories considered here - equities, bonds, and houses - we find that the failure to include housing prices resulted in the largest potential measurement error. This conclusion is also supported by a cursory look at some cross-country evidence.

Abstract:
The accelerated introduction of information and communications technology into the economy has created numerous challenges for policymakers. This paper describes this New Economy and then proceeds to examine difficulties created for policymakers. The increased flexibility of the new economy argues against trying to use fiscal policy for stabilization and creates both immediate and long-term difficulties for monetary policy. Immediate difficulties concern the problems associated with estimating potential output when the productivity trend is shifting. During periods of transition, it is extremely difficult to distinguish permanent from transitory shifts in output growth, and adjust policy correctly. In the long-term, central banks must face the prospect of a significant decline in the demand for their liabilities, and a resulting loss of their primary interest rate policy instrument. The disappearance of the demand for central bank money for interbank settlement seems very unlikely, and so this concern seems unwarranted.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Over the past twenty years, macroeconomic performance has improved in industrialized and developing countries alike. In a broad cross-section of countries inflation volatility has fallen markedly while output variability has either fallen or risen only slightly. This increased stability can be attributed to either: 1) more efficient policy-making by the monetary authority, 2) a reduction in the variability of the aggregate supply shocks, or 3) changes in the structure of the economy. In this paper we develop a method for measuring changes in performance, and allocate the source of performance changes to these two factors. Our technique involves estimating movements toward an inflation and output variability efficiency frontier, and shifts in the frontier itself. We study the change from the 1980s to the 1990s in the macroeconomic performance of 24 countries and find that, for most of the analyzed countries, more efficient policy has been the driving force behind improved macroeconomic performance.

Abstract:
This paper explores two aspects of the conduct of monetary policy under a monetary union. First, even if the preferences of policymakers over inflation and output variability are identical across member countries, differences in economic structure will mean different desired policy responses to even a common shock. Second, policymakers may be forced to make important concessions in their preferences over inflation and output variability. To examine these issues, in this paper we estimate the objective functions that the European national central banks were implicitly maximizing over the 15 or so years prior to monetary union, as well as the slopes of the inflation-output variability trade-off in each country.

While the slopes of the trade-offs vary dramatically across countries, the objective functions are quite similar, with most countries having weights in excess of three-quarters on inflation variability and less than one-quarter on output variability. Our findings suggest that the concessions (in terms of preferences over output and inflation variability) that current inflation-targeting countries such as the UK and Sweden would have to make on accession to the European Monetary Union (EMU) are likely to be minimal. On the other hand, the differences in economic structure across the Eurosystem countries might make it difficult to formulate a common policy even in the face of common goals, suggesting that there may still be significant costs to joining for countries currently outside the EMU.

Abstract:
In much of the world, growth is more stable than it once was. Looking at a sample of twenty-five countries, we find that in sixteen, real GDP growth is less volatile today than it was twenty years ago. And these declines are large, averaging more than fifty per cent. What accounts for the fact that real growth has been more stable in recent years? We survey the evidence and competing explanations and find support for the view that improved inventory management policies, coupled with financial innovation, adopting an inflation targeting scheme and increased central bank independence have all been associated with more stable real growth. Furthermore, we find weak evidence suggesting that increased commercial openness has coincided with increased output volatility.

Abstract:
No abstract is available for this paper.

Abstract:
Central bankers and financial supervisors can have conflicting goals. While monetary policymakers work to ensure sufficient lending activities as a foundation for high and stable economic growth, supervisors may limit banks lending capacities in order to prevent excessive risk taking. We show that, in theory, central bankers can avoid this potential conflict by adopting an interest rate strategy that takes accounts of capital adequacy requirements. Empirical evidence suggests that while policymakers at the Federal Reserve have adjusted their interest rate to neutralizing the procyclical impact of bank capital requirements, those in Germany and Japan have not.

Abstract:
Central bankers and financial supervisors often have different goals. While monetary policymakers want to ensure that there are always sufficient lending activities to maintain high and stable economic growth, supervisors work to limit banks. lending capacities in order to prevent excessive risk-taking. To avoid working at cross-purposes, central bankers need to adopt a policy strategy that accounts for the impact of capital adequacy requirements. In this paper we derive an optimal monetary policy that reinforces prudential capital requirements at the same time that it stabilizes aggregate economic activity. We go on to show that policymakers at the Federal Reserve adjust interest rate policy in a way that would neutralize the procyclical impact of bank capital requirements. By contrast, central bankers in Germany and Japan clearly do not act as the theory suggests they should.

Abstract:
In this history of the first decade of ECB policy, we also discuss key challenges for the next decade. Beyond the ECB's track record and an array of published critiques, our analysis relies on unique source material: extensive interviews with current and former ECB leaders and with other policymakers and scholars who viewed the evolution of the ECB from privileged vantage points. We share the assessment of our interviewees that the ECB has enjoyed many more successes than disappointments. These successes reflect both the ECB's design and implementation. Looking forward, we highlight the unique challenges posed by enlargement and, especially, by the euro area's complex arrangements for guarding financial stability. In the latter case, the key issues are coordination in a crisis and harmonization of procedures. As several interviewees suggested, in the absence of a new organizational structure for securing financial stability, the current one will need to function as if it were a single entity.

Abstract:
Modern central bankers are the risk managers of the financial system. They take actions based not only on point forecasts for growth and inflation, but based on the entire distribution of possible macroeconomic outcomes. In numerous instances monetary policymakers have acted in ways designed to avert disasters. What are the implications of this approach for managin the risks posed by asset price booms? To address this question, I study data from a cross-section of countries to examine the impact of equity and property booms on the entire distribution of deviation in output and price-level from their trends. The results suggest that housing booms worsen growth prospects, creating outsized risks of very bad outcomes. By contrast, equity booms have very little impact on the expected mean and variance of macroeconomic performance, but worsen the worst outcomes.

Abstract:
We study the dynamics of price indices for major U.S. cities using panel econometric methods and find that relative price levels among cities mean revert at an exceptionally slow rate. In a panel of 19 cities from 1918 to 1995, we estimate the half-life of convergence to be approximately nine years. These estimates provide an upper bound on speed of convergence that participants in European Monetary Union are likely to experience. The surprisingly slow rate of convergence can be explained by a combination of the presence of transportation costs, differential speeds of adjustment to small and large shocks, and the inclusion of non-traded good prices in the overall price index.

Abstract:
As inflation approaches zero, it becomes increasingly important to examine the price indices on which monetary policy is based. The most popularly used aggregate price statistic in the U.S. is the Consumer Price Index (CPI), a statistic that appears to be a focal point in monetary policy deliberations. A problem associated with using the CPI, a fixed weight index of the cost-of-living, is that there are likely to be biases in the index as a measure of inflation. In this paper we use a simple statistical framework to compute a price index that is immune to one of the potentially important biases inherent in the CPI as a measure of inflation--weighting bias. Utilizing a dynamic factor model we are able to compute the common inflation element in a broad cross-section of consumer price changes. Our conclusion is that, although there was a large positive weighting bias during the fifteen years beginning in 1967, since 1981 the weighting bias in the CPI as a measure of inflation has been insignificant.

Abstract:
This paper investigates the use of trimmed means as high-frequency estimators of" inflation. The known characteristics of price change distributions, specifically the observation" that they generally exhibit high levels of kurtosis, imply that simple averages of price data are" unlikely to produce efficient estimates of inflation. Trimmed means produce superior estimates" of core inflation,' which we define as a long-run centered moving average of CPI and PPI" inflation. We find that trimming 9% from each tail of the CPI price-change distribution from the tails of the PPI price-change distribution, yields an efficient estimator of core inflation" for these two series, although lesser trims also produce substantial efficiency gains. Historically the optimal trimmed estimators are found to be nearly 23% more efficient (in terms of root-mean-square error) than the standard mean CPI Moreover, the efficient estimators are robust to sample period and to the definition of the" presumed underlying long-run trend in inflation.

Abstract:
We study the output costs of 40 systemic banking crises since 1980. Most, but not all, crises in our sample coincide with a sharp contraction in output from which it took several years to recover. Our main findings are as follows. First, the current financial crisis is unlike any others in terms of a wide range of economic factors. Second, the output losses of past banking crises were higher when they were accompanied by a currency crisis or when growth was low at the onset of the crisis. When accompanied by a sovereign debt default, a systemic banking crisis was less costly. And, third, there is a tendency for systemic banking crises to have lasting negative output effects.

Cost of Crisis, Crises, Output loss, Recovery, Systemic Banking Crisis

Abstract:
We study the output costs of 40 systemic banking crises since 1980. Most, but not all, crises in our sample coincide with a sharp contraction in output from which it took several years to recover. Our main findings are as follows. First, the current financial crisis is unlike any others in terms of a wide range of economic factors. Second, the output losses of past banking crises were higher when they were accompanied by a currency crisis or when growth was low at the onset of the crisis. When accompanied by a sovereign debt default, a systemic banking crisis was less costly. And, third, there is a tendency for systemic banking crises to have lasting negative output effects.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
The dramatic improvement in macroeconomic outcomes during the 1990s - stable, low inflation and high, stable growth - can be at least partly ascribed to improved monetary policy. Central banks became more independent and many of them adopted inflation targeting. This paper examines the potential for further improvements by refining the concept of inflation targeting. We construct a general model that encompasses a broad array of possible target regimes, and apply it to the data. Our results suggest that the vast majority of countries could benefit from moving to pricepath targeting, where the central bank makes up for periods of above (below) target inflation with later periods of below (above) target inflation.

Abstract:
In recent years, central bankers throughout the world have advocated that monetary policy shift toward inflation targeting. Recent actions in the U.S. serve to highlight the desire of the Federal Reserve to keep inflation both low and stable, while downplaying the likely output and employment consequences. But control of inflation requires both that one be able to forecast the future path of the price level and that one have estimates of what impact policy changes have on that path. Unfortunately, inflation is very difficult to forecast at even very near horizons. This is true because the relationship of candidate inflation indicators to inflation is neither very strong nor very stable. Beyond this, the relationship between monetary policy instruments, such as the Federal Funds Rate, and inflation also varies substantially over time and cannot be estimated precisely. Construction of policy rules can take these difficulties into account. Several rules are examined, and they have the following interesting properties. First, since prices take time to respond to all types of impulses, the object of price stability implies raising the Federal Funds Rate immediately following a shock, rather than waiting for prices to rise before acting. Finally, comparison of the results of price level targeting with nominal income targeting suggests that the difficulties inherent in forecasting and controlling the former provide an argument for focusing on the latter.

Abstract:
In analyzing the macroeconomic impact of asset price booms and crashes, it is the disasters that are the true concern. This suggests a different approach to risk; one based on examining the keeping the probability of output deviating from its trend (or price level deviations from its target trend) over some time horizon below some fixed threshold. Policy responses should be built in order to keep this "GDP at risk", or it analog "Price-level at risk", sufficiently small. In this paper I use data from a broad cross-section of countries to examine GDP at risk and pricelevel at risk arising from booms and crashes in equity and property markets. I show that the distribution of GDP and price-level deviations from their trends have fat tails, so the probability of extreme events is higher than implied by a normal distribution. Specifically, housing booms create outsized risks of output declines. This means that policymakers who are intent on averting catastrophes should react. The question is: How?

Abstract:
We study a Lucas asset pricing model that is standard in all respects representative agent's subjective beliefs about endowment growth are distorted. Using constant-relative-risk-aversion (CRRA) utility a CRRA coefficient below ten that exhibit, on average, excessive pessimism over expansions and excessive optimism over" contractions, our model is able to match the first and second moments of the equity premium and" risk-free rate, as well as the persistence and predictability of excess returns found in the data."

Abstract:
In this paper, we investigate the use of limited-information estimators as measures of core inflation. Employing a model of asymmetric supply disturbances, with costly price adjustment, we show how the observed skewness in the cross-sectional distribution of inflation can cause substantial noise in the aggregate price index at high frequencies. The model suggests that limited-influence estimators, such as the median of the cross-sectional distribution of inflation, will provide superior short-run measures of core inflation.

We document that our estimates of inflation have a higher correlation with past money growth and deliver improved forecasts of future inflation relative to the CPI. Moreover, unlike the CPI, the limited-influence estimators do not forecast future money growth, suggesting that monetary policy has often accomodated supply shocks that we measure as the difference between core inflation and the CPI.

Among the three limited-influence estimators we consider -- the CPI excluding food and energy, the 15-percent trimmed mean, and the median -- we find that the median has the strongest relationship with past money growth and provides the most accurate forecast of future inflation. Using the median and several other variables including nominal interest rates and M2, our best forecast is that in the absence of monetary accomodation of any future aggregate supply shocks, inflation will average roughly 3 percent per year over the next five years.

Abstract:
This paper discusses how optimal monetary policy is affected by differences in the combination of shocks an economy experiences and the rigidities it exhibits. Without both nominal rigidities and economic shocks, monetary policy would be irrelevant. Recognizing this, policymakers increasingly incorporate the understanding gained from new research on rigidities and shocks into both their policy actions and the design of monetary institutions. Specifically, shocks can be predominantly real, affecting relative prices, or primarily nominal, moving the general price level. They may also be big or small, frequent or rare. Similarly, some nominal rigidities are symmetrical, affecting both upward and downward movements equally, while others are asymmetrical, restricting decreases more than increases. After reviewing major trends in the conduct of monetary policy, we describe how the growing theoretical and empirical literature on shocks and rigidities informs three crucial dimensions of monetary policymaking. First, we discuss why trimmed means provide the best measure of core inflation. Second, we outline how rigidities impede policymakers' ability to control inflation. And third, we describe how alternative shock/rigidity combinations create inflation's grease (whereby it improves economic efficiency by speeding adjustment) and sand effects (whereby it distorts price signals) with their contrasting implications for the optimal level of inflation. We conclude by considering some key implications for monetary policy.

Abstract:
Several explanations for the depth of the Great Depression presume that the -30% deflation of 1930-32 was unanticipated. For example, the debt-deflation hypothesis originally put forth by Irving Fisher is based on the notion that unanticipated deflation increases the burden of nominal debt, adversely affecting the banking system and the aggregate economy. Other theories imply on ex ante real interest rates being low during the period, and so it is essential that the deflation was unanticipated.

This paper measures inflationary expectations from data on prices, interest rates and money growth in order to investigate whether the deflation could have been anticipated. Current econometric techniques are used to compute expectations implied both by the univariate time series properties of the price level, and by the information contained in nominal interest rates. The major conclusion is that price changes were substantially serially correlated, and so once the deflation began, people expected it to continue. This implies both that the deflation was anticipated, and that real interest rates were very high during the initial phases of the Great Depression. These results call into question the validity of theories that rely on contemporary agents' belief in reflation during the early 1930s, and provide further support for the proposition that monetary contraction was the driving force behind the economic decline.

Abstract:
The author offers insight into the four papers presented.

capital regulation

Abstract:
In this paper, we reevaluate the evidence of seasonality in prices which we find to be substantially greater than previous research has indicated. That is, seasonal price movements have become more prominent in the relatively stable inflation environment that has prevailed since 1982. One main conclusion is drawn from this analysis: The amount of seasonality in prices differs greatly by item, making it difficult to generalize about seasonal price movements. A casual reading fails to reveal an easily identifiable origin of the seasonal variation of prices. That is, seasonality in consumer prices is predominantly idiosyncratic in nature, a result that contrasts with studies demonstrating a common seasonal cycle in real economic variables. This finding has an important practical implication: Given the selective, disaggregated approach taken by the Bureau of Labor Statistics to adjust data seasonally, the existence of idiosyncratic seasonality increases the likelihood of allowing noise in the aggregate CPI at a seasonal frequency. This argues in favor of seasonally adjusting the index after aggregation.

Abstract:
As central bankers intensify their focus on inflation as the primary goal of monetary policy, it becomes increasingly important to have accurate and reliable measures of changes in the aggregate price level. Measuring inflation is surprisingly difficult, involving two types of problems. Commonly used indices, such as the Consumer Price Index (CPI), contain both transitory noise and bias. Noise causes short-run changes in measured inflation to inaccurately reflect movements in long-run trends, while bias leads the long-run average change in the CPI to be too high. In this paper I propose methods of reducing both the noise and the bias in the CPI. Noise reduction is achieved by average monthly inflation in measures called trimmed means' over longer horizons. Trimmed means are statistics similar to the median that are calculated by ignoring the CPI components with extreme high and low changes each month, and averaging the rest. I find that using three month averages halves the noise, while removing the highest and lowest ten percent of the cross-sectional distribution of inflation reduces the monthly variation in inflation by one-fifth.

Abstract:
The design of rules for central bank policy has been a subject of increasing interest to many monetary economists. The purpose of this essay is first to present an analytical structure in which a policymaker is presumed to formulate a rule based on the solution to an optimal control problem, and then to examine a number of issues that are germane to the current debate on the nature of such rules. These issues include the implication for policymaking of the slope of the output-inflation variability frontier, the importance of various types of uncertainty, the consequences of a zero nominal interest rate floor, and the possible reasons for interest rate smoothing. Although this essay is intended to raise, rather than resolve, key questions concerning policy rules, it does offer fairly compelling evidence on one point. This concerns the potential consequences of the move by many central banks toward some form of price-level or inflation targeting. In adopting this approach, central banks are implicitly changing the relative importance of output and inflation variability in their objective function. The robustness of the policy rule, however, may depend on the shape of the output-inflation variability trade-off. The data indicate that this trade-off is extremely steep: small decreases in inflation variability are associated with very large increases in output variability. This finding suggests that pure inflation targeting may have very undesirable side effects.

Abstract:
The Euler equations derived from a broad range of intertemporal asset pricing models, together with the first two unconditional moments of asset returns, imply a lower bound on the volatility of the intertemporal marginal rate of substitution. We develop and implement statistical tests of these lower bound restrictions. We conclude that the availability of relatively short time series of consumption data undermines the ability of tests that use the restrictions implied by the volatility bound to discriminate among different utility functions.

Abstract:
No abstract is available for this paper.

Abstract:
Many Keynesian macroeconomic models are based on the assumption that firms change prices at different times. This paper presents an explanation for this "staggered" price setting. We develop a model in which firms have imperfect knowledge of the current state of the economy and gain information by observing the prices set by others. This gives each firm an incentive to set its price shortly after as many firms as possible. Staggering can be the equilibrium outcome. In addition, the information gains can make staggering socially optimal even though it increases aggregate fluctuations.

Abstract:
We study the dynamics of price indices for major U.S. cities using panel econometric methods and find that relative price levels among cities mean revert at an exceptionally slow rate. In a panel of 19 cities from 1918 to 1995, we estimate the half-life of convergence to be approximately nine years. The surprisingly slow rate of convergence can be explained by a combination of the presence of transportation costs, differential speeds of adjustment to small and large shocks, and the inclusion of nontraded goods prices in the overall price index.

Abstract:
No abstract is available for this paper.

Abstract:
its higher order moments, and in particular, its third moment the skewness of the price change distribution. Evidence on correlations between inflation and its moments goesback over thirty years, and was first used to reject the independence of relative price changes and inflation that is assumed in neo- classical models. More recently, New Keynesian macroeconomists have shown that the strong positive correlation between inflation and the skewness of the price change distribution is consistent with menu-cost models of price setting behavior. This is a fairly controversial result, prompting other researchers to demonstrate that the same correlation can be found in a multi- sector, flexible-price (real business cycle) model. We examine the small-sample properties of the main empirical finding on which this work is based: the positive correlation between the sample mean and sample skewness of price change distributions. Our results show that this particular statistic suffers from a large positive small-sample bias, and demonstrate that the entirety of the observed correlation can be explained by this bias. To the extent that we find any relationship at all, it is that the correlation is negative. In other words, we establish that one of the most accepted stylized facts in the literature on aggregate price behavior, that inflation and the skewness of the price change distribution are positively linked, need not be a fact at all.

Abstract:
Over the past 20 years, macroeconomic performance has improved in industrialised and developing countries alike. In a broad cross-section of countries inflation volatility has fallen markedly while output variability has either fallen or risen only slightly. This increased stability can be attributed to some combination of more efficient monetary policy making, a reduction in the variability of supply shocks, and changes in the structure of the economy. We develop a method for allocating performance changes among these factors. For 21 of the 24 countries we study, more efficient monetary policy has been the driving force behind improved performance.

Abstract:
Using disaggregated production data we show that the size of seasonal cycles changes significantly over the course of the business cycle. In particular, during periods of high economy-wide activity, some industries smooth seasonal fluctuations while others exaggerate them. We interpret this finding using a simple analytical model that describes the conditions under which seasonal and cyclical fluctuations can be separated. Our model implies that seasonal fluctuations can safely be disentangled from cyclical fluctuations only when the marginal cost of production is linear, and the variation in demand and cost satisfy certain (restrictive) conditions. The model also suggests that inventory movements can be used to isolate the role of demand shifts in generating any interaction between seasonal cycles and business cycles. Thus, the empirical analysis involves studying the variation in seasonally unadjusted patterns of production and inventory accumulation over different phases of the business cycle. Our finding that seasonals shrink during booms and that firms carry more inventories into high sales seasons during a boom leads us to conclude that for several industries, marginal cost slopes up at an increasing rate. Conversely, in a couple of industries we find that seasonal swings in production are exaggerated during booms and that inventories are drawn down prior to high sales seasons, suggesting that marginal costs curves flatten as production increases. Overall, we find considerable evidence that there are non-linear interactions between business cycles and seasonal cycles.

Abstract:
We study twenty years of monthly production data for 11 manufacturing industries in 19 countries. Using the fact that in some countries production virtually shuts down for one summer month, together with the differences in the timing of aggregate cyclical fluctuations, we are able to learn about the cost structure of different industries. Our primary finding is that during a boom year summer shut-downs are shorter. Rather than increasing production further during the rest of the year, producers reallocate activity from high output months to low output months. We also find that there are important seasonal/cyclical interactions common to all industries within a given country, and that these countries effects are larger than the pure industry effects. The correlation of the cross-country differences with measures of taxation and labor market structure suggests the possibility that differences in the willingness (and ability) to substitute labor intertemporally are responsible for the variation.

Abstract:
Transparency is one of the biggest innovations in central bank policy of the past quarter century. Modern central bankers believe that they should be as clear about their objectives and actions as possible. However, is greater transparency always beneficial? Recent work suggests that when private agents have diverse sources of information, public information can cause them to overreact to the signals from the central bank, leading the economy to be too sensitive to common forecast errors. Greater transparency could be destabilizing. While this theoretical result has clear intuitive appeal, it turns on a combination of assumptions and conditions, so it remains to be established that it is of empirical relevance. In this paper we study the degree to which increased information about monetary policy might lead to individuals coordinating their forecasts. Specifically, we estimate a series of simple models to measure the impact of inflation targeting on the dispersion of private sector forecasts of inflation. Using a panel data set that includes 15 countries over 20 years we find no convincing evidence that adopting an inflation targeting regime leads to a reduction in the dispersion of private sector forecasts of inflation. While for some specifications adoption of inflation target does seem to reduce the standard deviation of inflation forecasts, the impact is rarely precise and always small.

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Abstract:
Special Issue: Central Bank Liquidity Tools and Perspectives on Regulatory Reform.

Abstract:
This paper shows that in several U.S. manufacturing industries, the seasonal variability of production and inventories varies with the state of the business cycle. We present a simple model which implies that if firms reduce the seasonal variability of their production as the economy strengthens, and they either hold constant or increase the stock of inventories they bring into the high-production seasons of the year, then they must be facing upward-sloping and convex marginal cost curves. We conclude that firms in a number of industries face upward-sloping and convex marginal-production-cost curves.