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The author examines Allan Meltzer's career in terms of the search of a nominal anchor for the U.S. Inflation targeting has provided a nominal anchor, in line with Meltzer's view of inflation as a monetary phenomenon. Determining how close U.S. monetary policy has been to optimal in the past 20 years can give an idea of further gains that could be reaped by going beyond inflation targeting and committing to a Taylor-type rule, as favored by Meltzer. The author provides two examples: The flattening of the Phillips curve can be interpreted as a hallmark of optimal policy; the falling short of the 2 percent price level path established between 1995 and 2012 suggests room for improvement. Whether further gains from coordinating inflation expectations can be achieved is an important area of future research that surely will be influenced by Meltzer's work. [ABSTRACT FROM AUTHOR]

The financial crisis of 2007-09 and its aftermath turned monetary economics and policymaking on its head and called into question many of the conventional views held before the crisis. One of the most popular and enduring views in all of monetary economics since the 1970s, and indeed since the 1940s, has been that a nominal interest rate peg is poor monetary policy and that attempts to pursue such a policy would lead to ruin. Yet, post-crisis U.S. monetary policy could be interpreted as exactly that-an interest rate peg-and an extreme one at that, since the policy rate has remained near zero for nearly seven years. The author summarizes some recent academic work on the idea of a stable interest rate peg and what its implications may be for current monetary policy choices. He argues that a stable interest rate peg is a realistic theoretical possibility; that it has some mild empirical support based on a cursory look at the data; and that, should we find ourselves in a persistent state of low nominal interest rates and low inflation, some of our fundamental assumptions about how U.S. monetary policy works may have to be altered. [ABSTRACT FROM AUTHOR]

Since 2007-09, the Federal Reserve has pursued a very aggressive monetary policy strategy. This strategy has been associated with healthy labor market conditions, moderate economic growth, and inflation--netting out the effects of a major oil price shock--that is close to the Federal Open Market Committee's (FOMC's) 2 percent target. Thus, with the economy returning to normal, it is natural for the FOMC to begin the process of exiting its highly accommodative policy. The FOMC has laid out several well-defined steps for this process. This strategy may be called central bank orthodoxy, since it is a natural extension of the classical view. However, three challenges to this orthodoxy have developed. Although each challenge is interesting and potentially helpful, the orthodox view provides a better basis for devising near- and medium-term monetary policy decisions. [ABSTRACT FROM AUTHOR]

Monetary policy choices going forward are explicitly tied to labor market performance. Hence, the sharp decline in the labor force participation rate following the 2007-09 recession has become a salient topic. Presented here are a summary of labor force participation rate data and projections, a survey of the literature that studies the recent decline in the participation rate, and a view toward fruitful paths for future research. [ABSTRACT FROM AUTHOR]

In this paper the author discusses the possibility that the U.S. economy may become enmeshed in a Japanese-style deflationary outcome within the next several years. To frame the discussion, the author relies on an analysis that emphasizes two possible long-run steady states for the economy: one that is consistent with monetary policy as it has typically been implemented in the United States in recent years and one that is consistent with the low nominal interest rate, deflationary regime observed in Japan during the same period. The data considered seem to be quite consistent with the two steady-state possibilities. The author describes and critiques seven stories that are told in monetary policy circles regarding this analysis and emphasizes two main conclusions: (i) The Federal Open Market Committee's "extended period" language may be increasing the probability of a Japanese-style outcome for the United States and (ii), on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome. [ABSTRACT FROM AUTHOR]

The authors study the interaction among population demographics, the desire for intergenerational redistribution of resources in the economy, and the optimal inflation rate in a deterministic life cycle economy with capital. Young cohorts initially have no assets and wages are the main source of income; these cohorts prefer relatively low real interest rates, relatively high wages, and relatively high rates of inflation. Older cohorts work less and prefer higher rates of return from their savings, relatively low wages, and relatively low inflation. In the absence of intergenerational redistribution through lump-sum taxes and transfers, the constrained efficient competitive equilibrium requires optimal distortions on relative prices. The authors' model allows the social planner to use inflation/deflation to try to achieve the optimal distortions. In the model economy, changes in the population structure are interpreted as the ability of a particular cohort to influence the redistributive policy. When older cohorts have more influence on the redistributive policy, the economy has a relatively low steady-state level of capital and a relatively low steady-state rate of inflation. The opposite happens when young cohorts have more control of policy. These results suggest that aging population structures, such as those in Japan, may contribute to observed low rates of inflation or even deflation. [ABSTRACT FROM AUTHOR]

The author discusses the effectiveness of fiscal approaches to stabilization policy. The conventional wisdom before 2007 was that fiscal policy intervention as a stabilization tool had little to recommend it, mostly due to political constraints and to the unlikely effectiveness of many types of temporary fiscal policy actions. However, with short-term nominal interest rates near zero, attention turned again toward fiscal stabilization policy. The author describes and critiques two theories of how fiscal policy might be viewed as effective in such circumstances. One, heavily studied, is that a tax-financed increase in government expenditures would temporarily increase total output in the economy. The other, lightly studied but rhetorically forceful, is that increased government expenditures may inspire confidence. Both theories have drawbacks, but the author argues the first is dying because of three considerations: (i) actual political systems are ill-suited to implement the advice from the theory; (ii) monetary stabilization policy has been quite effective, making fiscal experiments redundant; and (iii) governments pushed distortionary taxes into the future, which in the theory reduces or eliminates the desired effects. [ABSTRACT FROM AUTHOR]

The article offers the author's insights on arguments favoring core inflation as a focus in discussions of monetary policy in the U.S. The author mentions the argument considering headline inflation as more volatile than core one but claims that it should not affect policy making. Several line graphs are presented on inflation including one on personal consumption expenditures (PCI), another on Medical care price from 1991 to 2011, and one on the computing technology's price from 1991 to 2011.

In this paper the author discusses the possibility that the U.S. economy may become enmeshed in a Japanese-style deflationary outcome within the next several years. To frame the discussion, the author relies on an analysis that emphasizes two possible long-run steady states for the economy: one that is consistent with monetary policy as it has typically been implemented in the United States in recent years and one that is consistent with the low nominal interest rate, deflationary regime observed in Japan during the same period. The data considered seem to be quite consistent with the two steady-state possibilities. The author describes and critiques seven stories that are told in monetary policy circles regarding this analysis and emphasizes two main conclusions: (i) The Federal Open Market Committee's "extended period" language may be increasing the probability of a Japanese-style outcome for the United States and (ii), on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome. [ABSTRACT FROM AUTHOR]

This article is a modified version of a presentation given at the Federal Reserve Bank of Philadelphia's policy forum "Policy Lessons from the Economic and Financial Crisis," December 4, 2009. The presentation was made during a panel discussion that also included John Taylor and N. Gregory Mankiw. [ABSTRACT FROM AUTHOR]

How did problems in a relatively small portion of the home mortgage market trigger the most severe financial crisis in the United States since the Great Depression? Several developments played a role, including the proliferation of complex mortgage-backed securities and derivatives with highly opaque structures, high leverage, and inadequate risk management. These, in turn, created systemic risk-that is, the risk that a triggering event, such as the failure of a large financial firm, will seriously impair financial markets and harm the broader economy. This article examines the role of systemic risk in the recent financial crisis. Systemic concerns prompted the Federal Reserve and U.S. Department of the Treasury to act to prevent the bankruptcy of several large financial firms in 2008. The authors explain why the failures of financial firms are more likely to pose systemic risks than the failures of nonfinancial firms and discuss possible remedies for such risks. They conclude that the economy could benefit from reforms that reduce systemic risks, such as the creation of an improved regime for resolving failures of large financial firms. [ABSTRACT FROM AUTHOR]

The article discusses the use of potential output data in policy-making with reference to both shorter-run fluctuations and longer-run growth. It is stated that with current economic models, it is difficult to depict the time-varying business cycle and growth path. It is suggested that for proper detrending of data, a mainstream core growth model should be used which is enhanced with occasional trend breaks and learning.

The article presents a speech by James B. Bullard, president of the Federal Reserve Bank of St. Louis, delivered at the Regional Economic Summit, Evansville, Indiana on November 20, 2008 in which he discussed how the U.S. economy is affecting the bank, the response of the Federal Reserve to this economic turmoil and the challenges his Federal Reserve colleagues face.

Can monetary policy guide expectations toward desirable outcomes when equilibrium and welfare are sensitive to alternative, commonly held rational beliefs? This paper studies this question in an exchange economy with endogenous debt limits in which dynamic complementarities between dated debt limits support two Pareto-ranked steady states: a suboptimal, locally stable autarkic state and a constrained optimal, locally unstable trading state. The authors identify feedback policies that reverse the stability properties of the two steady states and ensure rapid convergence to the constrained optimal state. [ABSTRACT FROM AUTHOR]

Expectations of the future play a large role in macroeconomics. The rational expectations assumption, which is commonly used in the literature, provides an important benchmark, but may be too strong for some applications. This paper reviews some recent research that has emphasized methods for analyzing models of learning, in which expectations are not initially rational but which may become rational eventually provided certain conditions are met. Many of the applications are in the context of popular models of monetary policy. The goal of the paper is to provide a largely nontechnical survey of some, but not all, of this work and to point out connections to some related research. [ABSTRACT FROM AUTHOR]

Examines the consequences of Taylor-type monetary policy rules through a dynamic model of the U.S. macroeconomy. Overview of previous studies on monetary policies; Policy rule with equity prices; Effects of including equity prices in a Taylor rule.

Examines the implications of the shift of an economy toward productivity on the structure of monetary policy rules in a dynamic economies. Equation of the short-term Phillips curve that shows the relationship between inflation and output gap; Aim of a central bank in developing a monetary policy; Stabilization of inflation and output performance under strict inflation-targeting policies.

Discusses the tests conducted to prove the long-run neutrality effect of injecting money into the macroeconomy. Explanation on long-run neutrality; Details on testing neutrality propositions based on different data; Conclusions.

Examines the status of a well known argument for a positive rate of steady state inflation. Illustration of the argument for stability through inflation by Vickrey (1954) and Phelps (1972); Summary of the rational expectations solution.

Examines from a nonstructural, low frequency point of view, the basic proposition that money growth and inflation are closely related in the long run. Extension of Robert E. Lucas' illustration of the validity of the quantity theory; Support for money's long run neutrality; Statistical basis.

The article presents a speech by James Bullard, president of the Federal Reserve Bank of St. Louis, delivered at the thirty-third Annual Policy Conference of the bank, which was held from October 20 to 21, 2008 in the U.S. Bullard discussed the concept and measurement of potential output and growth, and the role of potential output in monetary policymaking. He states that a focus on the long-run objective is needed for making correct economic stabilization policy.