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Comments on a paper by Jordi Galí published in this same issue which revisits a property embedded in most dynamic macroeconomic models: the stationarity of hours worked. Investigation into how much of the business cycle is accounted for by technology shocks; Fundamental problem with identification of vector autoregressions by means of long-run restrictions; Graph showing the response of employment to technology shock.

The author comments on the paper by Gaetano Antinolfi et al on a macroeconomic model with heterogenous agents in which incomes fluctuate, aggregate income remains constant and frictions inhibiting the strict enforcement of private contracts place endogenous limits on agents' ability to borrow and lend and engage in intertemporal trade. He asserts that the paper was the first to consider the important distinction between active and passive monetary policy rules in a heterogenous-agent model.

Presents abstracts of research on economics. "Effectiveness of Official Daily Foreign Exchange Market Intervention Operations in Japan," by Rasmus Fatum and Michael Hutchison; "Macroeconomic Effects of IMF-Sponsored Programs in Latin America: Output Costs, Program Recidivism, and the Vicious Cycle of Failed Stabilization," by Michael Hutchison and Ilan Noy; "Determinants of Voluntary Bank Disclosure: Evidence From Japanese Shinkin Banks," by Mark Spiegel and Nobuyoshi Yamori.

Presents several abstracts on economic research in Asia. 'The Evolution of "Too-Big-To-Fail" Policy in Japan: Evidence from Market Equity Values,' by Mark M. Spiegel and Nobuyoshi Yamori; 'Pegging and Macroeconomic Performance in East Asia,' by Ramon Moreno; 'Financial Turbulence and the Japanese Main Bank Relationship,' by Mark M. Spiegel and Nobuyoshi Yamori.

Linearized New Keynesian models and empirical no-arbitrage macro-finance models offer little insight regarding the implications of changes in bond term premiums for economic activity. This paper investigates these implications using both a structural model and a reduced-form framework. The authors show that there is no structural relationship running from the term premium to economic activity, but a reduced-form empirical analysis does suggest that a decline in the term premium has typically been associated with stimulus to real economic activity, which contradicts earlier results in the literature. [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]

In this paper, the authors document a growing divergence between current account imbalances in northern and southern euro area countries from 1992 to 2007. The imbalance occurred without a concomitant rise in productivity and growth in the southern (deficit) countries. The authors argue that systematic monitoring of external imbalances and implementation of better coordinated policies to prevent the emergence of unsustainably large imbalances in the euro area is advisable because (i) country heterogeneity and the absence of optimal currency area characteristics may lead to the emergence of large current account imbalances without automatic gains in productivity and economic growth to sustain these imbalances, (ii) the absence of sufficient market-based adjustment mechanisms substantially increases the costs of ultimate adjustment toward more sustainable current account positions, and (iii) large external imbalances--particularly through the major role of the banking system--potentially have strong negative consequences for fiscal policy. [ABSTRACT FROM AUTHOR]

This paper revisits a property embedded in most dynamic macroeconomic models: the stationarity of hours worked. First, the author argues that, contrary to what is often believed, there are many reasons why hours could be nonstationary in those models, while preserving the property of balanced growth. Second, the author shows that the postwar evidence for most industrialized economies is clearly at odds with the assumption of stationary hours per capita. Third, he examines the implications of that evidence for the role of technology as a source of economic fluctuations in the G7 countries. [ABSTRACT FROM AUTHOR]

Discusses whether changes in the monetary policy shock or its impulse function an important cause of the change in the variability in output. Discussion on the relative stability of the macroeconomy; Changes in the impulse response of monetary policy shocks.

Defends the author's paper dealing with the microeconomic foundations for monetary policy which was published in the May/June 1995 issue of Federal Reserve Bank of Saint Louis' `Review' magazine. Costs of information as result of the uncertainty on the duration of observed changes; Paper's lack of attack or opposition to the development of micro-foundations for macroeconomics.

Introduces the six papers and six commentaries presented at the 23rd annual economic policy conference of the Federal Reserve Bank of St. Louis, Missouri concerning the issues of labor economics and macroeconomics. Kenneth McLaughlin's article about the skewness of the distribution of wage changes; Truman Bewley's `Why Wages Don't Fall During a Recession'; Discussion on the compensation process by Erica Groshen and Mark Schweitzer; Gilles Saint-Paul's study of job protection.

Understanding and forecasting inflation has always been a key focus of macroeconomics and monetary policymaking. Historically, many macroeconomists and central banks have relied on the "Phillips curve" framework for this purpose. Recently, however, the Phillips curve framework has not been performing well. This article examines a number of possible explanations for the breakdown of the "Phillips curve" relationship between slack and inflation. These explanations include the possibility that the curve may have flattened or shifted, that standard measures may not be capturing key aspects of the relationship, or that a series of "unfortunate" and unprecedented events may have obscured the underlying relationship. Each of these explanations has some merit and support, but each seems unable to explain how inflation dynamics have evolved over the past decade. This article suggests that what is missing is a more comprehensive treatment of how globalization has affected domestic prices, through channels such as increased trade flows, the greater economic heft of emerging markets, and increased ease of using global supply chains to shift parts of production to cheaper locations. This greater role for globalization in explaining inflation, however, does not mean that the standard Phillips curve framework is "dead." Rather, macroeconomists and monetary policymakers should update their existing models in two key ways: to include global parameters more explicitly and allow these parameters to adjust over time with the world economy. [ABSTRACT FROM AUTHOR]

This paper presents an empirical strategy that bridges the gap between event studies and macroeconomic forecasts based on common-factor models. Event studies examine the response of financial variables to a market-sensitive "surprise" component using a narrow event window. The authors argue that these features--narrow event window and surprise component--can be easily embedded in common-factor models that study the real-time impact of macroeconomic announcements on key policy variables such as inflation or gross domestic product growth. Demonstrative applications are provided for Swiss inflation that show that (i) the communication of monetary policy announcements generates an asymmetric response for inflation forecasts, (ii) the pass-through effect of import price releases on inflation forecasts is weak, and (iii) macroeconomic releases of real and nominal variables generate nonsynchronized effects for inflation forecasts. [ABSTRACT FROM AUTHOR]

In 2007 Britain experienced its first run on a bank of any macroeconomic significance since 1866. This was not dealt with by the method that had maintained banking stability for so long: letting the bank fail but supplying abundant liquidity to the markets to prevent contagion. In this paper the authors examine why that traditional solution was not used and propose changes to Britain's deposit insurance system, to its bank insolvency regime, and in arrangements to allow customers access to banking services should their bank be closed-so that the traditional approach can once more be used to mitigate moral hazard. [ABSTRACT FROM AUTHOR]

Some analysts and economists recently warned that the U.S. economy faces a much higher risk of recession should the price of oil rise to $100 per barrel or more. In February 2008, spot crude oil prices closed above $100 per barrel for the first time ever, and since then they have climbed even higher. Meanwhile, according to some surveys of economists, it is highly probable that a recession began in the United States in late 2007 or early 2008. Although the findings in this paper are consistent with the view that the U.S. economy has become much less sensitive to large changes in oil prices, a simple forecasting exercise using Hamilton's model augmented with the first principal component of 85 macroeconomic variables reveals that a permanent increase in the price of crude oil to $150 per barrel by the end of 2008 could have a significant negative effect on the growth rate of real gross domestic product in the short run. Moreover, the model also predicts that such an increase in oil prices would produce much higher overall and core inflation rates in 2009 than most policymakers expect. [ABSTRACT FROM AUTHOR]

Comments on the institutional characteristics of central banks and the regimes they operate and their influence on macroeconomic performance. Spillovers between countries; Emphasis on the order of magnitude of interest elasticities that come out of most macroeconomic models; Information on aggregate demand and supply shocks.

Presents the text of a lecture for the Homer Jones Lecture at the Federal Reserve Bank of Saint Louis in Missouri which deals with the role of monetarism in shaping macroeconomic modeling and developing monetary policy by the European Central Bank and the United States Federal Reserve. Features of monetarism; Three changes in the consensus macroeconomic model; Monetary policy in Japan as of September 2001.

Reviews the key contributions in new open economy macroeconomics in the United States as of May 2001. Details on the redux open economy model; Modifications based on the specification of nominal rigidities in macroeconomic models; Directions for stochastic open economy modeling.

The article focuses on whether inequality is determined solely through a natural process or through the interaction of innate differences with man-made institutions and policies. It examines modern quantitative economics providing a wide set of powerful tools, which enable researchers to build laboratories in which various hypotheses regarding origins and consequences of inequality can be studied. It informs that U.S. economy today provides ample motivation for studying distributional issues.

A dilemma faced by forecasters is that data are not all sampled at the same frequency. Most macroeconomic data are sampled monthly (e.g., employment) or quarterly (e.g., GDP). Most financial variables (e.g., interest rates and asset prices), on the other hand, are sampled daily or even more frequently. The challenge is how to best use available data. To that end, the authors survey some common methods for dealing with mixed-frequency data. They show that, in some cases, simply averaging the higher-frequency data produces no discernible disadvantage. In other cases, however, explicitly modeling the flow of data (e.g., using mixed data sampling as in Ghysels, Santa-Clara, and Valkanov, 2004) may be more beneficial to the forecaster, especially if the forecaster is interested in constructing intra-period forecasts. [ABSTRACT FROM AUTHOR]

This article discusses various challenges in the specification and implementation of "macro- finance" models in which macroeconomic variables and term structure variables are modeled together in a no-arbitrage framework. The author classifies macro-finance models into pure latent-factor models ("internal basis models") and models that have observed macroeconomic variables as state variables ("external basis models") and examines the underlying assumptions behind these models. Particular attention is paid to the issue of unspanned short-run fluctuations in macro-economic variables and their potentially adverse effect on the specification of external basis models. The author also discusses the challenge of addressing features such as structural breaks and time-varying inflation uncertainty. Empirical difficulties in the estimation and evaluation of macro- finance models are also discussed in detail. [ABSTRACT FROM AUTHOR]

The article focuses on the issues with the financial safety net protecting debt holders as well as depositors of financial institutions in the U.S. It is noted that the recession has recreated much of the intellectual and policymaking environment despite the progress happening in macroeconomics modeling. The author stresses the presence of the short-term emphasis given on financial intermediation revival along with the depression.

The article discusses the New Keynesian Phillips curve (NKPC) including its history, structural estimation, and its implications of the nominal rigidities. It notes that statistical relationship between inflation and unemployment is correlated to low employment outcomes. It mentions that policymakers agreed that the objective effect of monetary policy should be low and constant inflation in 1970. However, results of a survey show that NKPC has no agreement on nominal price rigidities in the aggregate economy. Furthermore, it suggests that research between the relevance of unemployment and inflation will remain as an active theory in the area of macroeconomics.

The article focuses on nominal frictions and relative price adjustments, and the limits to monetary policy in the U.S. It states that if prices or wages are sticky in only one sector of an economy, and if there is no heterogeneity across regions, the monetary policy can loosen the effects of price stickiness. However, if there is more than one sector with sticky prices, the nominal rigidities cause distortions under any monetary policy. The author also described several examples of distortions, such as frictions in labor market or monopoly power in goods markets.

Outlines the implications of some of the conference papers of Federal Reserve Banks in the U.S., focusing on broad themes that have relevance for monetary policy. Interpretations of economists of the monetary policy problem; Interaction between macroeconomic policy and observed macroeconomic performance; Use by Leeper and Zha in 2003 of a model to investigate how a central bank might implement monetary policy.

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.

Considers the roles of economic theory and empirical evidence in bringing about changes in monetary policy formulation. Outline of the general analytic trends in macroeconomics; Evolution of monetary policymaking in practice; Conclusion.

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.

Focuses on the development of monetary policy analysis. Studies conducted on monetary analysis; Discussion on the upsurge of the real-business-cycle approach to macroeconomic analysis; Three main components included in the quantitative macroeconomic model.

Opinion. Comments on the paper `Inflation Targeting in a St. Louis Model of the 21st Century,' presented by Robert G. King and Alexander L. Wolman, to the Federal Reserve Bank of Saint Louis' 1996 Economic Policy Conference. Effects of alternative monetary and fiscal policies; Abstraction used in the study; Practicality of inflation targeting policy.

Opinion. Comments on the paper `Inflation Targeting in a St. Louis Model of the 21st Century,' presented by Robert G. King and Alexander L. Wolman, to the Federal Reserve Bank of Saint Louis' 1996 Economic Policy Conference. Effects of alternative monetary and fiscal policies; Optimality of stable prices.

Presents a study which examined the macroeconomic effects of government spending under lump-sum and income tax financing. Discussion on hypothetical economy; Equilibrium of a model economy; Methodology of the study; Conclusions.

Opinion. Presents the author's view on issues about quality change in consumer price indexes which are contained in Charles R. Hulten's article, `Quality Change in the CPI: The Neglected Cost Dimension.' Two components of Hulten's article; Views on link bias; Other aspects of consumer price index revisions that are of concern to macroeconomists; Other researchers' views on quality change in the context of growth models.

Comments on the article `Information, Sticky Prices and Macroeconomic Foundations,' by Allan H. Meltzer, published in the May/June 1995 issue of Federal Reserve Bank of Saint Louis' `Review' magazine. State of macroeconomics; Defense of the use of general-equilibrium modeling in macroeconomics; General methodological issues.