|
President's Speech
Luncheon Keynote Speech to the Annual Washington
Policy Conference Sponsored by the National Association for Business
Economics (NABE)
Washington D.C.
By Janet L. Yellen, President and CEO of the Federal Reserve Bank of
San Francisco
For delivery on Monday, March 13, 2006, 12:45 PM Eastern Time, 9:45 AM Pacific
Enhancing Fed Credibility
Good afternoon. It's always a pleasure to speak to
the members of NABE, and I very much appreciate the
invitation to participate in
this year's Economic Policy Conference.
My remarks today will focus on the issue of credibility—in particular
on the Federal Reserve's credibility regarding its announced commitment
to maintaining price stability. I will discuss ways in which the Federal
Reserve could improve transparency and communication, enhancing Fed
credibility and the effectiveness of monetary policy.
To my mind, credibility is a worthy end in itself—those who
are credible are often said to be "as good as their word." But credibility
is not only virtuous; it is also useful. I will argue that one of its
most important benefits is shaping public expectations about inflation,
and in particular, "anchoring" those expectations to price stability.
As a consequence, credibility enhances the effectiveness of monetary
policy which, in turn, serves a second "worthy end," namely, maximizing
the nation's economic well-being.
To give you a brief overview of the argument, the idea is that, with
credibility, the Fed and the public work together toward the same goals.
When this happens, one often hears the phrase "the markets do all the
work of monetary policy," meaning that market participants correctly
anticipate the actions that the Fed will make in response to economic
news and shocks. This alignment of the Fed's actions and the public's
expectations strengthens the monetary policy transmission mechanism
and shortens policy lags. In contrast, in the absence of credibility,
policymakers and the public may work at cross-purposes, and monetary
policy must act to overcome and dislodge expectations that hinder the
achievement of our goals. Indeed, as I will discuss more fully in a
few minutes, this is exactly what happened in the 1970s in the United
States.
Credibility is all about what the public expects the Fed will do in
the future. Indeed, macroeconomic theory teaches us that expectations
of future economic developments play a prominent role in all aspects
of economic decision-making. For example, consumption theory tells
us that consumer spending depends on one's permanent income, that is,
the present value of expected future income. Similarly, bond yields
depend on expected future short-term interest rates. The list goes
on and on. Of critical importance for the successful conduct of monetary
policy, economic theory tells us that prices set today depend on the
inflation rate expected in the future. Therefore, it is only when the
Fed's commitment to low inflation is credible that people will expect
low inflation in the future and set prices accordingly. Clearly, then,
expectations of future inflation play a central role in our analysis
of the economy and in our policy deliberations.
We have certainly seen the grim consequences when the Fed's commitment
to low inflation is not credible. Let me step briefly back
in time to remind you. In the 1950s and early 1960s the Fed had accumulated
an enviable track record of maintaining price stability—for example,
the personal consumption expenditures (PCE) price index inflation rate
averaged a little more than 1-1/2% from 1955 to 1965.1 But,
starting in the late 1960s, the grip on inflation had begun to slip.
By 1970, the core measure of PCE price index inflation roughly tripled
to over 4-1/2%; and then between 1970 and 1980, it doubled to over
9%. Not surprisingly, by 1980, the public had little faith in the Fed's
commitment to price stability, and in that year, expectations of inflation
for the next ten years reached 8%. The economy had entered a wage-price-expectations
spiral where higher inflation fed into higher wage demands and higher
expected inflation, which fed back into higher inflation. Worse yet,
high inflation occurred at the same time as high unemployment: stagflation
had set in.
To be sure, the 1970s were a challenging period for monetary policy.
Sizable negative supply shocks, including the oil price shocks and
the productivity slowdown, created difficult short-run tradeoffs between
the Fed's dual goals—maximum sustainable employment and price
stability. But monetary policy decisions at the time also greatly exacerbated
these problems.
Research suggests that the dismal macroeconomic record of the 1970s
could have been significantly improved if the Fed had "taken ownership" of
the inflation situation—that is, if it had paid close and consistent
attention to keeping inflation contained. By doing so, it would have
done a better job of anchoring expectations to low inflation. For example,
one study analyzed the effects of supply shocks when the Fed has imperfect
credibility and the public continuously reevaluates its perception
of Fed policy based on what occurs in the economy.2 It
showed that a sustained rise in inflation combined with accommodative
monetary policy, like the one that occurred during the late 1960s and
much of the 1970s, impels a process that undermines the public's confidence
in the Fed's commitment to low inflation. In other words, these developments
eventually erode the cable tethering expectations to price stability
as people come to believe that the prevailing high inflation rate will
persist into the indefinite future, just as occurred in the 1970s.
If, instead, the Fed responds enough to stem the rise in inflation,
inflation expectations remain well anchored to price stability. This
research suggests that if the Fed had followed such a policy during
the 1970s, even in the face of those severe supply shocks, the result
would have been lower and much more stable inflation and unemployment,
which, in turn, would have obviated the need for the painful disinflationary
recessions of the early 1980s. This research also suggests another
very important benefit of central bank credibility—that is, of
monetary policy that successfully anchors expectations to price stability.
Such a policy can improve the achievement of both parts of the Fed's
dual mandate: maximum sustainable employment and price stability. When
the public is confident in the Fed's commitment to price stability,
the Fed has more latitude to respond to fluctuations in labor and product
markets, because there is less risk that an easing of policy will unleash
a wave of inflation fears.3
Fortunately, the Fed's commitment to price stability has indeed become
far more credible since the 1970s, so I can illustrate this point based
on some recent experience. In 2001, the Fed was able to cut rates aggressively
in response to the recession, confident that inflation expectations
would remain low. Similarly, over the past two years, wages, core inflation,
and long-run inflation expectations have remained well contained despite
a dramatic increase in energy prices. With inflation expectations under
control, we have avoided a rehash of the 1970s and the need to rein
in inflation by engineering a severe recession.
How has the Fed built this credibility? As I said at the outset, the
Fed, like other central banks, has earned its credibility: It has a
long track record of delivering low and stable inflation. But digging
deeper into the process, I'd like to focus on two aspects of policy—one
having to do with policy actions and the other with the words that
support those actions—that have changed dramatically since the
1970s and that have contributed to this admirable track record.
First, in terms of policy actions, the Fed has become more systematic
in its approach to maintaining price stability and promoting maximum
sustainable employment. This systematic approach is well-described
by the famous "Taylor Rule" (Taylor 1993). According to the Taylor
Rule, an increase in inflation should consistently call forth a tighter
monetary policy in the form of a higher real federal funds rate. In
addition, the Fed should systematically tighten policy as labor market
slack diminishes. Such a response serves to stabilize output and employment
and also to preempt an increase in inflation. The experience of 1994
exemplifies the application of these principles: faced with declining
unemployment and the prospect of an unwelcome increase in inflation,
the Fed engineered a strong funds rate response. Because the Fed has
been consistent in its approach, over time, market participants have
come to observe its reaction to news and therefore better understand
the determinants of policy. Therefore, this approach has enhanced the
ability of financial markets to anticipate the policy response to economic
developments.
Second, the Fed has taken a number of steps to improve the public's
understanding of its policy decisions through an increased emphasis
on communication and transparency. In early 1994, just twelve years
ago, the FOMC first started to announce explicitly changes in the federal
funds rate target in the post-meeting press release. Later that year,
it added descriptions of the state of the economy and the rationale
for the policy action to the release. In 2000, the FOMC introduced
a statement describing the "balance of risks" to the outlook, and in
2002 the Committee began releasing the votes of its individual members
and the preferred policy choices of any dissenters. In 2003, the FOMC
first gave forward-looking guidance on policy in the post-meeting release,
stating "that policy accommodation can be maintained for a considerable
period." Finally, last year, it decided to release the minutes of its
meetings with a much shorter delay—only three weeks, as opposed
to just after the subsequent meeting. This shorter time horizon provides
the public with a more timely and nuanced understanding of the various
views within the Committee.
This enhanced transparency complements the systematic approach because
it, too, helps the markets anticipate the Fed's response to economic
developments. Recent research highlights the ways in which central
bank communication can improve the public's ability to predict policy
actions, and how this improvement can enhance the effectiveness of
policy at stabilizing the economy.4The
key insight of this research is that the central bank has useful knowledge
about the likely direction of the economy and monetary policy that
the public does not have. Conveying this information to the public
better aligns private and central bank expectations about policy and
the economy. And this appears to be working in practice: financial
markets have become much better at forecasting the future path of monetary
policy than they were up to the late 1980s, and are more certain of
their forecast ex ante, as measured by implied volatilities from options
contracts.5
Enhanced transparency is particularly valuable when policy has to deviate from
its normal, systematic approach. A good illustration comes from 2003,
when inflation fell below a comfortable level and there was a threat
of outright deflation. In post-FOMC meeting statements issued that
year, the FOMC referred to "…an unwelcome fall in inflation…" and
worried about "…the risk of inflation becoming undesirably low…" Consistent
with the findings of economic research, it made sense for the FOMC
to take a more accommodative stance than otherwise would be
expected until this threat had passed.6 For
this policy strategy to work, it required that the public understand
it and correctly foresee that policy would remain accommodative for
some time. Again, it is the public's expectation of future actions,
not just the current setting of the fed funds rate, that matters for
bond rates, inflation expectations, and other economic variables. Therefore,
the FOMC statement at that time said, "In these circumstances,
the Committee believes that policy accommodation can be maintained
for a considerable period." This forward-looking language itself
seems to have helped keep long-term interest rates low, which added
stimulus to the economy and helped avoid deflation.
I believe these two features of Fed monetary policy—a systematic
approach to policy and the steps towards more open communication and
transparency—are particularly noteworthy in contributing to our
policy success over the past two decades. They have helped strengthen
public confidence in the Fed and thereby helped anchor inflation expectations
to price stability. Additionally, by providing clear explanations of
its policies to the public, greater transparency has also enhanced
Fed accountability, a vital consideration for a government institution
in a democracy.
But, despite the many steps that we have made on communication and
transparency, other central banks have gone further than the Fed. Indeed,
a growing number of "inflation targeting" central banks explicitly
state a numerical objective for the inflation rate and provide reports
detailing their economic forecasts.7 There
has been a great deal of discussion of whether the Federal Reserve
should likewise take further steps towards more open communication,
including publicly announcing a specific, numerical inflation objective.
I will spend the remainder of my remarks addressing this question,
looking first to the results from theoretical and empirical research
on the effects of such communication.
First, what are the benefits of adopting a numerical objective for
inflation? In theory, effective central bank communication of a numerical
long-run inflation objective to the public can simplify the complicated
informational problems people face in the economy, and can reduce the
uncertainty about the central bank's goals and policies. Indeed, recent
research suggests that clear communication of a numerical long-run
inflation objective may assist in the anchoring of long-run inflation
expectations, relative to a policy that leaves it to the public to
infer the objective from experience.8 The
resulting improved alignment of Fed actions and public perceptions
would reduce expectations errors that would otherwise add to macroeconomic
variability. As a result, the Fed would be better able to achieve both
inflation and employment goals. In the parlance of economists, communication
of a numerical long-run inflation objective could shift inward the "macroeconomic
possibilities frontier"—the economy's menu of feasible output
and inflation volatility combinations. Of course, for communication
to be effective, policymakers must consistently take appropriate actions
that back up the commitment to price stability and full employment.
Another important reason to provide clear guidance to the public regarding
the long-run inflation objective is that doing so may help us avoid
deflation and reduce the costs of its occurrence. We have long known
that inflation can be too high, but the recent experience of Japan
has reminded us that inflation can be too low as well. We know from
history that such an outcome can be extremely damaging to the economy.
Perhaps the most unsettling aspect of the experience of Japan over
the past decade is how difficult it can be to extract oneself from
deflation. An explicit numerical long-run inflation objective may help
anchor inflation expectations at a low positive number and avoid a
potentially devastating deflationary spiral.
What is the empirical evidence on the value of an explicit numerical
inflation objective? So far, it has been hard to find convincing evidence
that countries with an announced numerical inflation objective have
performed better in terms of inflation and macroeconomic stabilization
than those that do not have one. Part of the problem is that there
just aren't enough macroeconomic data to get a clear read on this question.9 But
we do have data on inflation expectations that provide evidence about
the effect of communication on anchoring expectations, which is the
key mechanism that improves macro performance in the theoretical research
I've discussed.
Surveys of long-run inflation expectations have been remarkably stable
in both the United States and in inflation-targeting countries over
the past ten years. Indeed, based on the evidence from survey data,
it's hard to argue that inflation expectations are not pretty well
anchored already.10 An
extreme example is provided by the Survey of Professional Forecasters;
its median forecast of inflation over the next ten years has barely
budged from 2.5% over the past six years, despite large fluctuations
in energy prices and other disturbances.
But, the evidence on the stability of long-run inflation expectations
in the United States derived from financial markets is not quite so
reassuring. Researchers using measures of inflation expectations derived
from bond market data find that long-run inflation expectations in
inflation-targeting countries are remarkably stable and well-anchored,
while in the United States long-run inflation expectations have been
highly sensitive to economic news.11 These
studies examine far-ahead forward inflation compensation—the
difference between far-ahead forward interest rates on nominal and
inflation-indexed bonds—to measure long-term inflation expectations.
Although this measure of long-term inflation "compensation" is noisy
and by no means perfect, the extent to which it moves in response to
major economic news—such as economic data releases and monetary
policy announcements—nonetheless sheds light on the stability
of long-term inflation expectations in a given country. Thus, if ten-year-ahead
forward inflation compensation does not respond significantly or systematically
to major economic news, then that suggests that financial market participants
have relatively well-anchored views about the long-term outlook for
inflation in that country.
For the United States, they find that far-ahead forward inflation
compensation has exhibited significant, systematic responses to macroeconomic
data releases and monetary policy announcements. These responses suggest
that developments that affect the near-term outlook for the economy
also pass through to expectations of inflation at much longer horizons.
However, in countries with explicit numerical inflation objectives,
including Canada and Sweden, the research finds that long-term inflation
compensation has been unresponsive to economic news. Although the evidence
from surveys and financial markets is admittedly mixed, taken together
these studies suggest that announcing a numerical price stability objective
and greater transparency in general could help further anchor long-run
inflation expectations.
My personal view is that the steps that we have already taken toward
greater transparency have been a good thing, and that we should think
seriously about venturing further along this path. As Mae West famously
said, "Too much of a good thing can be wonderful." More seriously,
although it is possible to carry transparency too far—I would
not, for example, want live television coverage of FOMC meetings—I
support the idea of a quantitative objective for price stability. I
believe that it enhances both Fed transparency and accountability and
that it offers important benefits, as I have discussed. In particular,
it could help to anchor the public's long-term inflation expectations
from being pushed too far up or down, and thus help avoid both destabilizing
inflation scares and deflations; a credible inflation objective could
thereby enhance the flexibility of monetary policy to respond to the
real effects of adverse shocks.
A numerical definition of price stability could also help to focus
and clarify our own analysis and discussions in the FOMC. For example,
the Board staff regularly prepares detailed forecasts and analyses
of monetary policy options. But, this otherwise quite sophisticated
analysis is hampered by the lack of clear guidance as to what exactly
the long-run inflation objective is.12 In
particular, it is difficult to derive and analyze the appropriate path
for policy when one does not know what the policy goal is. Similarly,
I think the discussion of risks to price stability at the policy table
would gain a sharper focus if we had a numerical price stability objective.
Indeed, articulating an explicit numerical long-run inflation objective
may not be such a big step as some people imagine. Many people have
interpreted the FOMC statements in 2003 that I mentioned before as
signaling a lower bound for the amount of inflation the FOMC will accept
and statements in other years placing an upper bound on acceptable
inflation. In addition, several FOMC members have already publicly
referred to their comfort zones for inflation and these have been repeated
by the press and market analysts. Therefore, such a declaration may
serve to solidify and clarify what people already believe to be true.
In my view, the choice of a specific inflation objective should depend,
in part, on an evaluation of the costs and benefits of very low inflation.
The inflation objective should contain a buffer sufficient to make
sure that the lower bound on the nominal interest rate does not interfere
with the ability of monetary policy to stabilize the economy and that
downward nominal wage rigidity does not interfere with overall labor
market performance. Factors such as the magnitude of the neutral real
funds rate, the degree of macroeconomic volatility, and the pace of
productivity growth, are relevant in assessing the size of the needed
buffer. Estimates of the extent of measurement bias in the relevant
inflation indices must also figure into the choice of the numerical
objective.13
The choices of a specific index, objective, and range are matters
on which judgments may differ. Taking the various factors that I mentioned
into account, I see an inflation rate of 1-1/2% as measured by the
core personal consumption expenditures price index, with a comfort
zone extending between 1 and 2%, as an appropriate price stability
objective for the Fed. In terms of setting a long-run goal, I think
it makes sense to focus our public communication on one specific price
index. Doing so is simpler and more transparent than giving out multiple,
potentially contradictory, objectives for different price indices.
Of course, the issue of the appropriate level of the long-run inflation
objective should be occasionally revisited. If the fundamental factors
influencing this choice of a numerical inflation objective were to
change significantly, the level of the objective should be revised
accordingly.
As with any change in procedure, there are potential drawbacks. One
is the possibility that some observers may misinterpret the enunciation
of a long-run inflation objective as a down-weighting of the Committee's
mandate to foster maximum employment. Moreover, there is an actual
risk that the Committee's performance with respect to the employment
goal could actually be compromised if too short a time frame is allowed
for the attainment of the price-stability objective. To reduce the
risk of such an outcome, the announcement of any numerical inflation
objective should be made in the context of clear and effective communication
of the Fed's multiple goals. Here, I am drawn to some specific language
proposed by Chairman Bernanke (2003), while he was a Fed Governor: "the
FOMC regards this inflation rate as a long-run objective only and sets
no fixed time frame for reaching it. In particular, in deciding how
quickly to move toward the long-run inflation objective, the FOMC will
always take into account the implications for near-term economic and
financial stability." I concur that the numerical objective is a long-run
goal, and would want the Committee to have a flexible time frame within
which to maintain it.
But, you may ask: If the FOMC were to announce a numerical long-run
price stability objective, why shouldn't the Fed also announce a target
for full employment, the other half of the dual mandate? In fact, the
Full Employment and Balanced Growth Act of 1978—often referred
to as the Humphrey-Hawkins Act—did that, stipulating a 4% unemployment
rate target, as well as a zero inflation target. However, unlike the
inflation rate, which is under the long-run control of the central
bank, the Fed does not have the capacity to achieve any long-run unemployment
objective that is not consistent with economic fundamentals.
Of course, we do attempt to gauge the level of maximum sustainable
employment in analyzing the economy and evaluating policy choices.
However, the two pieces of this puzzle, the natural rate of unemployment
and trend labor force participation, change over time in unpredictable
ways and are measured with considerable error. In the spirit of clearer
communication, I think it would be worthwhile to communicate more fully
to the public our analysis and views on the economic outlook and estimates
of sustainable employment, unemployment, and output. But, raising these
estimates to the level of a formal explicit numerical long-run unemployment
objective would be misguided and confusing, and could endanger our
hard-won credibility.
In addition to announcing a numerical price stability objective,
I believe the Fed should continue to enhance its communications regarding
the economic outlook and perspectives on monetary policy. Other central
banks have adopted a wide range of communications practices aimed at
improving both transparency and accountability. We should carefully
study whether any of these might be suitable for the Federal Reserve
to adopt. Although policymakers may not see the future perfectly, we
do know what we are thinking about in terms of policy, and we should
convey that information to the public as best we can.
In summary, the Fed has made significant progress in building credibility
over the past two decades by following systematic and appropriate monetary
policy and gradually increasing the quality of our communication and
transparency. I think it makes sense to take this transparency at least
one step further by articulating a numerical price stability objective.
I recognize that there are potential costs to doing so, but to my mind,
they are outweighed by the benefits. Such a step could further enhance
the credibility of the Fed and improve the effectiveness of monetary
policy not only for controlling inflation but also for stabilizing
employment and output.
References
Ball, Lawrence, and Niamh Sheridan. 2003. "Does Inflation Targeting Make a
Difference?" In The Inflation-Targeting Debate, eds. B. Bernanke
and M. Woodford. Chicago: University of Chicago Press.
Bernanke, Ben S. 2003. Remarks at the 28th Annual Policy Conference: "Inflation
Targeting: Prospects and Problems," Federal Reserve Bank of St.
Louis, October 17.
Bernanke, Ben S., Thomas Laubach, Frederic S. Mishkin, and Adam S.
Posen. 1999. Inflation Targeting: Lessons from the International
Experience. Princeton, NJ: Princeton University Press.
Gürkaynak, Refet S., Andrew T. Levin, Andrew N. Marder, and Eric
T. Swanson. 2006. "Inflation Targeting and the Anchoring of Inflation
Expectations in the Western Hemisphere." Forthcoming in Monetary
Policy under Inflation Targeting, eds. F. Mishkin and K. Schmidt-Hebbel.
Santiago, Chile: Banco Central de Chile.
Gürkaynak, Refet S., Andrew T. Levin, and Eric T. Swanson. 2006. "Does
Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence
from Long-Term Bond Yields in the U.S., U.K., and Sweden." Federal
Reserve Bank of San Francisco Working Paper 2006-09.
http://www.frbsf.org/publications/economics/papers/2006/wp06-09bk.pdf
Gürkaynak, Refet S., Brian Sack, and Eric T. Swanson. 2003. "The
Excess Sensitivity of Long-Term Interest Rates: Evidence and Implications
for Macroeconomic Models." Federal Reserve Board of Governors Finance
and Economics Discussion Series 2003-50.
http://www.federalreserve.gov/pubs/feds/2003/200350/200350abs.html
Gürkaynak, Refet S., Brian Sack, and Eric T. Swanson. 2005. "The
Sensitivity of Long-Term Interest Rates to Economic News: Evidence
and Implications for Macroeconomic Models." American Economic Review 95(1)
(March) pp. 425-436.
Johnson, David R. 2002. "The Effect of Inflation Targeting on the
Behavior of Expected Inflation: Evidence from an 11-Country Panel." Journal
of Monetary Economics 49, pp. 1493-1519.
Kohn, Donald L. 2005. "Discussion of ‘Inflation Targeting in
the United States?'" In The Inflation-Targeting Debate, eds.
B. Bernanke and M. Woodford. Chicago: University of Chicago Press,
pp. 337-350.
Kuttner, Kenneth N. 2004. "A Snapshot of Inflation Targeting in its
Adolescence." In The Future of Inflation Targeting, eds. C.
Kent and S. Guttmann. Sydney, Australia: Reserve Bank of Australia.
Lange, Joe, Brian Sack, and William Whitesell. 2003. "Anticipations
of Monetary Policy in Financial Markets." Journal of Money, Credit,
and Banking 35(6, part 1) (December), pp. 889-910.
Lebow, David, and Jeremy Rudd. 2003. "Measurement Error in the Consumer
Price Index: Where Do We Stand?" Journal of Economic Literature 41
(March) pp. 159-201.
Orphanides, Athanasios, and John C. Williams. 2005a. "The Decline
of Activist Stabilization Policy: Natural Rate Misperceptions, Learning,
and Expectations." Journal of Economic Dynamics and Control (November),
pp. 1927-1950.
Orphanides, Athanasios, and John C. Williams. 2005b. "Imperfect Knowledge,
Inflation Expectations, and Monetary Policy." In The Inflation-Targeting
Debate, eds. B. Bernanke and M. Woodford. Chicago: University
of Chicago Press, pp. 201-234.
Orphanides, Athanasios, and John C. Williams. 2006. "Inflation Targeting
under Imperfect Knowledge." Forthcoming in Monetary Policy under
Inflation Targeting, eds. F. Mishkin and K. Schmidt-Hebbel, Santiago,
Chile: Banco Central de Chile.
Reifschneider, David, and John C. Williams. 2000. "Three Lessons for
Monetary Policy in a Low Inflation Era." Journal of Money, Credit,
and Banking 32(4, part 2) pp. 936-966.
Romer, Christina, and David Romer. 2002. "A Rehabilitation of Monetary
Policy in the 1950s." American Economic Review Papers and Proceedings 92
(May).
Rudebusch, Glenn D., and John C. Williams. 2006, "Revealing the Secrets
of the Temple: The Value of Publishing Interest Rate Projections." Federal
Reserve Bank of San Francisco, manuscript.
Schmidt-Hebbel, Klaus, and Frederic Mishkin. 2006. "Does Inflation
Targeting Make a Difference?" Forthcoming in Monetary Policy under
Inflation Targeting, eds. F. Mishkin and K. Schmidt-Hebbel, Santiago,
Chile: Banco Central de Chile.
Svensson, Lars, and Robert Tetlow. 2005. "Optimal Policy Projections." International
Journal of Central Banking (December).
Swanson, Eric. 2006. "Have Increases in Federal Reserve Transparency
Improved Private Sector Forecasts of Short-Term Interest Rates?" Forthcoming
in Journal of Money, Credit, and Banking.
Taylor, John B. 1993. "Discretion versus Policy Rules in Practice." Carnegie-Rochester
Conference Series on Public Policy 39 (December).
1 For a discussion of Fed policy during this period,
see Romer and Romer (2002).
2 Orphanides and Williams (2005a, b).
3 Orphanides and Williams (2005b) show that when the
central bank has imperfect credibility, policies that respond relatively
weakly to inflation do worse at stabilizing both inflation and output.
4 See Rudebusch and Williams (2006).
5 See Lange, Sack, and Whitesell (2003) and Swanson
(2006).
6 See Reifschneider and Williams (2000) for an analysis
of monetary policy when inflation rates are very low.
7 These central banks have also adopted a full-fledged "inflation
targeting" framework. In addition to stating a numerical inflation
objective, they typically provide a time frame over which inflation
is expected to return to the target level. They also provide periodic
detailed reports on the current and projected future state of the economy,
with a particular focus on the outlook for inflation. See Bernanke
et al. (1999) and Kuttner (2004) and citations contained therein for
descriptions of inflation targeting practices around the world.
8 See Orphanides and Williams (2005b, 2006).
9 See, for example, Bernanke et al. (1999), Johnson
(2002), Ball and Sheridan (2004), and Schmidt-Hebbel and Mishkin (2006).
10 See Kohn (2005).
11 Gürkaynak, Sack, and Swanson (2003, 2005),
Gürkaynak, Levin, and Swanson (2006), Gürkaynak, Levin, Marder,
and Swanson (2006).
12 See Svensson and Tetlow (2005) for an example
of the type of optimal monetary policy analysis conducted at the Board
of Governors for the FOMC.
13 See Lebow and Rudd (2003) for a recent survey
of the literature on measurement bias.
# # #
|
