The Decline in the Natural Rate of Interest

With the Federal Reserve widely expected to begin normalization of monetary policy in the wake of the Great Recession—perhaps in 2015—an important question for public policy and private-sector planning is what the “new normal” for interest rates is likely to be. In particular, are real interest rates likely to be lower in the future than in recent decades? An investigation through the use of the Kalman filter shows that the natural rate of interest—the real federal funds rate consistent with the economy operating at its full potential—has declined since 1980, especially after the Great Recession. This will have important implications for monetary policy and for the private sector, including recognition that the natural rate of interest is not fixed.     

The Financial Crisis and the Implementation of Monetary Policy

The ongoing financial crisis has had a dramatic impact on how the Federal Reserve conducts monetary policy. In this paper I outline how the Federal Reserve implements monetary policy during “ordinary” circumstances, and compare and contrast this with how it has implemented policy in the wake of the crisis, especially in the latter part of 2008.     

Macroeconomic information and stock prices

The paper analyzes the response of stock prices to the announcements of 15 representative macroeconomic variables. Stock prices respond primarily to announcements of monetary variables. Stocks of financial companies are the most sensitive to monetary news. Implicit in the stock price reactions are the market perceptions that the Federal Reserve plays an important role in future macroeconomic developments. The post-October 1982 change in the operating target of the Federal Reserve did not affect the stock price responses substantially, although it did affect the corresponding responses of short-term interest rates.     

Persistent Unemployment and Policy Uncertainty: Numerical Evidence from a New Approach

In the recovery from the United States’ 2009 recession, unemployment has proven resistant to both aggressive fiscal policy and expansionary monetary policy. A possible explanation is the policy cost uncertainty hypothesis. This holds that managers of private firms have been rationally avoiding hiring workers in the years after 2010 because of the risk of higher future costs imposed by government policies. However, such a hypothesis cannot be directly tested in standard models of firm behavior. Thus, to formally test the policy cost uncertainty hypothesis, we use a novel “value functional” or “recursive” model of firm behavior, in which managers maximize the value of the business rather than its profits. Using this approach, we demonstrate that policy cost uncertainty affects the hiring decisions of firms, that the response to policy uncertainty is higher in some industries than others, and that the scale of the firm also affects its sensitivity to policy risk. This approach has potentially broad application within business economics, particularly in evaluating investment and hiring decisions; real options; and other aspects of uncertainty, fixed costs, and managerial flexibility.     

The Small Business Sector in Recent Recoveries

Small businesses account for half of private GDP, half of the private workforce, and most new jobs. This paper documents that small businesses have fared unusually poorly in the current recovery, dragging down output and employment growth, even while large businesses and agriculture have prospered. The reasons for the poor performance of small business are documented and analyzed with data from surveys of the National Federation of Independent Business. The findings contradict much conventional wisdom relating to six broad aspects of small business activity: employment and hiring plans, expectations and investment, past sales and earnings, inventories, prices, and credit conditions. The implication of the findings is that a robust economic recovery for the entire U.S. economy will depend on public policy that is tailored to permit and encourage small business expansion.     

The Monetary Policy Model

Most monetary economists today conduct their analysis within some version of a rational expectations model. A well-defined equilibrium in such a model requires that the private sector understand policy goals and the policymakers' model of the economy. An austere version of the model, with no information asymmetries, is valid only to a first approximation but nevertheless provides core insights to short- and long-run monetary policy. In this model, effective policy requires clarity of policy goals and clarity of the policy model as to how the economy works. The central bank must enjoy sustained credibility in the markets. Communication should focus on policy fundamentals and the monetary authorities’ understanding of the economy, both of which are enhanced by continued research by monetary policy experts. JEL Classification E5     

Keynote Speech: Federal Reserve Policy in the Post-Crisis Period

The Federal Open Market Committee (FOMC) engaged in a series of extraordinary monetary policy actions in the wake of the Global Financial Crisis of 2007–2008 to support economic activity in the United States. Interest rates were lowered to their effective lower bound and the Fed’s balance sheet was greatly expanded through a series of large-scale asset purchase programs. As the U.S. economy has recovered, “normalization” of monetary policy (which will be data-dependent) has drawn closer. This article reviews some factors that may impact the post-normalization course of monetary policy.     

The Effectiveness of Central Bank Independence vs. Policy Rules

This paper assesses the relative effectiveness of central bank independence vs. policy rules for the policy instruments in bringing about good economic performance. It examines historical changes in (1) macroeconomic performance, (2) the adherence to rules-based monetary policy, and (3) the degree of central bank independence. Macroeconomic performance is defined in terms of both price stability and output stability. Both de jure and de facto central bank independence at the Federal Reserve are considered. The main finding is that changes in macroeconomic performance during the past half century were closely associated with changes in the adherence to rules-based monetary policy and in the degree of de facto monetary independence at the Federal Reserve. But changes in economic performance were not associated with changes in de jure central bank independence. Formal central bank independence alone has not generated good monetary policy outcomes. A rules-based framework is essential.     

Quantitative Easing in the Eurozone: a One-Year Assessment

By pumping trillions of euros into the eurozone’s financial system, the ECB’s quantitative easing programme intends to indirectly alter the private sector’s borrowing and spending behaviour. After more than a year since its initial inception, a review of the programme’s impact reveals that policy makers should think twice before further expanding the programme–and could benefit from considering more direct ways of increasing spending in the real economy.     

The Economy Today and a Policy Framework for Today and Tomorrow

The U.S. economy appears to be on track for a sustainable recovery, dominated by private demand, with major components of growth other than residential construction likely to grow at a healthy rate through 2011. Inflation is likely to remain in an acceptable zone, but policymakers must be vigilant concerning inflation expectations. Employment is expected to recover slowly. Within this broad outlook, uncertainty appears to be growing, particularly with the unrest in the Middle East and North Africa. This uncertainty implies that flexibility is essential in either extending Federal Reserve asset purchases or in exiting from its current position. Given that passive unwinding of this position will probably not be feasible and that monetary policy acts with lags, it is important to employ a forward-looking rule to guide action.     

Forecast errors before and during the Great Moderation

This paper investigates the change in private sector and Federal Reserve forecasts before and during the Great Moderation. We view the Great Moderation as a natural experiment. Using forecasts produced by the Survey of Professional Forecasters and the Federal Reserve (Greenbook forecasts) we investigate three questions: (1) How large was the decline in forecast errors? (2) Did forecast accuracy improve relative to the decline in volatility of growth and inflation? (3) Did forecasters respond to the Great Moderation? We find that the absolute median error as well as the cross-sectional volatility of forecast errors decreased significantly. Forecasters appeared to have narrowed the dispersion of their forecasts in response to the Great Moderation. Forecast accuracy did not improve relative to the reduction in the volatility of the economy.     

浅析美联储“量化宽松”的货币政策

从2008年3月27日至2010年3月18日,美联储面对汹涌而来的金融危机打开印钞机,资产总额大幅上升,基于美联储所采取的种种举动,总结出美联储量化宽松的货币政策的特点,并且分析它所产生的影响。     

美国经济的信贷紧缩和美联储货币政策工具创新

2007年美国爆发次贷危机,次贷危机引发信贷紧缩,信贷紧缩对美国实体经济的消极影响具体表现为:住宅投资急剧下降、企业投资急剧下降和个人消费支出的减少。信贷紧缩影响了实体经济,使美国陷入了经济衰退。美联储在这次金融危机中为稳定金融体系积极充当金融体系"最终贷款人"角色,美联储在使用传统金融工具的同时,积极创新,开发了多种新的工具。定期拍卖工具、定期证券出借工具、一级交易商信贷工具、与外国中央银行的货币互换和干预商业票据市场。当然,美联储一系列的政策创新举措也引发了许多担忧。     

Threats to monetary policy independence: reasons to be concerned

Several legislative efforts are under way that aim to impose greater congressional oversight of and influence on the monetary policy decision making of the Federal Reserve System. Some of these initiatives might do little harm or even make marginal improvements. But others pose more serious threats to the operational independence of monetary policy. Proposals to require the Federal Reserve to frame monetary policy decisions according to a mathematical formula imply a concrete simplicity of policy that is inaccurate and misleading. And the reporting requirements associated with these proposals threaten to negate the major advantage of monetary policy as a countercyclical weapon—speed. Proposals to subject the non-monetary policy functions of the Fed to the appropriations process provide Congress with additional leverage that could be used to apply pressure to monetary policy decisions. For its part, the Fed should continue to increase transparency through more timely and complete release of relevant information and analysis. To best promote the objectives of stable prices and maximum employment, the operational independence of the Federal Reserve’s monetary policy decision making needs to be preserved and protected.     

The Federal Reserve's Mandate: Long Run

Given the slow recovery of the U.S. economy, quantitative easing of monetary policy in the form of U.S. Federal Reserve asset purchases has been attractive. However, it is not clear that the current and likely future economic environment warrants this policy, given its long-term risks. This paper outlines these risks and makes the case for a return to conventional policy by allowing currently held assets to roll off the Federal Reserve's balance sheet as they reach maturity and by resuming more conventional monetary policy. This is not a quick fix, but it is less risky than current policy in achieving the Federal Reserve's long-run dual mandate of price stability and maximum employment.     

<Emphasis Type="Italic">In</Emphasis>flexible Wages and Prices? Evidence in the Current Recession

The 2008/9 recession period brought the most massive and quickest response of fiscal and monetary policy in modern economic history. At the same time, small businesses (that produce half of private GDP) exhibited the most rapid adjustments in wages, prices, and inventories recorded in the past 35 years of data collected by the National Federation of Independent Business. The notion of “sticky” wages and prices plays a key role in arguments favoring government intervention to rebalance supply and demand for labor and output. The faster wages and prices (and therefore employment and output) adjust to a “shock” to the economy, the less the need for government intervention.     

The Depoliticization of Monetary Policy

In the past thirty years, it has been claimed that Republicans tend to favor relatively restrictive monetary policy while Democrats favor relatively accommodative monetary policy. Another claim is that, regardless of which political party is in power, monetary policy tends to be relatively restrictive during the first two years of an administration and relatively accommodative during its final two years. The present paper finds an absence of empirical evidence supporting either claim by restricting the sample period to the past quarter century (1982–2006). The depoliticization of monetary policy decisions probably reflects, among other factors, both the post-1970s new-Keynesian consensus in macroeconomic theory and the realization of political independence of the Federal Reserve System during the Volcker-Greenspan years. Editor’s note: After this article was submitted and accepted for publication by Business Economics, Mr. Tempelman took a position with the Federal Reserve Bank of New York. The views expressed are strictly those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.     

Racing to the exits: International transmissions of funding shocks during the Federal Reserve's taper experiment

In May 2013, the U.S. Federal Reserve announced the beginning of the end of the program of monthly security purchases, the so-called “tapering.” The announcement was associated with large investor outflows from EM funds and large fund re-allocations across countries and stocks. Unexpected flow-implied fund upward (downward) allocations are associated with positive (negative) individual security returns following the announcement. The effect is pronounced in EM stocks that had positive cumulative abnormal returns around earlier Federal Reserve asset-purchase announcements leading up to the taper. It is concentrated in more liquid, smaller capitalization stocks and is stronger for forced trades among funds with more active country bets.     

Monetary policy and bank risk-taking: Evidence from emerging economies

This paper addresses the impact of monetary policy on banks' risk-taking by using bank-level panel data from more than 1000 banks in 29 emerging economies during 2000–2012. We find that, consistent with the proposition of the “bank risk-taking channel” of monetary policy transmission, banks' riskiness increases when monetary policy is eased. This result is robust when we adopt alternative measures of monetary policy and bank risk, and use different econometric methodologies. In addition, we find that bank risk-taking amid expansionary monetary policy is less conspicuous in a more consolidated banking sector and when monetary policy is more transparent.     

Federal Reserve Independence in the Aftermath of the Financial Crisis: Should We Be Worried?

The extraordinary circumstances of the past few years have led to extraordinary responses by the Federal Reserve and other central banks. These ventures into uncharted waters have heightened political scrutiny to the point of raising concern about future independence. In discussing independence of the Federal Reserve, it is important to separate its regulatory and supervisory functions from its monetary policy function. It is the latter in which the question of independence is most important. History indicates that independent monetary policy has been a powerful deterrent to inflation. This paper outlines the threats to Federal Reserve independence, particularly as it exists from the unconventional policies that it pursued to mitigate the financial crisis. Economists have an important role in making the case that monetary policy remains independent.