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Since its inception in the early nineteenth century, the U.S. commercial paper market has grown to become a key source of short-term funding for major businesses, with issuance averaging over $100 billion per day. In the fall of 2008, the commercial paper market achieved national prominence when increasing market stress caused some to fear that, given its size and importance, the market's failure would sharply worsen the recession. The Department of the Treasury and Federal Reserve enacted programs targeted at providing credit and liquidity to restore investor confidence. The authors review the history of the commercial paper market, describe its structure and key relationships to money market mutual funds, and present a detailed discussion of the crisis in the market, including the resulting Federal Reserve programs. [ABSTRACT FROM AUTHOR]

Presents a list of working papers from the Federal Reserve Bank of Saint Louis, Missouri in 2003. "Asymmetric Common Trends: An Application of Monetary Policy in a Markov-Switching VECM," by Neville Francis and Michael T. Owyang; "FOMC Forecasts: Is All the Information in the Central Tendency?," by William T. Gavin; "Does Consumer Sentiment Predict Regional Consumption?," by Thomas A. Garrett.

Presents several working papers from the Federal Reserve Bank of Saint Louis, Missouri which contain preliminary results of staff research as of 2002.

Presents several working papers from the Federal Reserve Bank of Saint Louis that contain preliminary results of staff research made available to encourage comment and discussion. Some of the 1997 working papers; The 1996 working papers; More.

Lists the working papers from the Federal Reserve Bank of Saint Louis, Missouri containing preliminary results of staff research from 1991 to 1996. Includes `Discount Rate Policies of Five Federal Reserve Chairman,' by Daniel L. Thornton; `Dependent Children and Aged Parents: Funding Education and Social Security in an Aging Economy,' by Patricia S. Pollard and Rowena A. Pecchenino.

Presents a list of working papers submitted to the Federal Reserve Bank of St. Louis in Saint Louis, Missouri from 1991 to 1995. Includes `Dependent Children and Aged Parents: Funding Education and Social Security in an Aging Economy,' by Patricia S. Pollard and Rowena A. Pecchenino; `The Baby Boom and Economic Growth,' by Peter S. Yoo; `The P-Star Model and Austrian Prices,' by John A. Tatom.

Argues that the discount window, properly administered, can help the government direct temporary credit subsidies through the banking system to firms suffering from a panic in nonbank financial market. Commercial paper crisis of the 1970; Penn Central as an example of a beneficial discount window intervention; Stabilizing effect of the discount window on nonbank financial market.

What is the impact of large swings in economic policy on the risk-return trade-off faced by i nvestors? What is the impact of changes in policy regimes on investment strategies? In this paper we study the impact on returns of switches between periods of market-friendly economic policies and periods of populist policies. To quantify the impact of policy instability, we use data from Argentina--a country that has experienced frequent and very large regime changes--and find that the risk-return for individual assets and minimum variance portfolios are quite different across regimes. We then develop a dynamic model to understand optimal portfolios when investors are cognizant that regimes can change. We find that when portfolios are unrestricted, it is optimal for investors to take a large amount of risk. On the other hand, when portfolios are restricted to include only long positions, a real asset (real estate) dominates financial assets. [ABSTRACT FROM AUTHOR]

Opinion. Comments on the paper by Jerome Stein about the Federal Reserve's role in improving the economic condition of the United States. Function of the M2 aggregate as a monetary indicator to guide monetary policy; Federal Reserve's achievement of price stability; Relationship between M2 growth and a particular economic variable; Interpretation of evidence on monetary indicators.

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.

Introduces the papers published in the July/August 2005 issue of "Federal Reserve Bank of St. Louis Review."

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.

Comments on market anticipations of monetary policy actions. Application of federal funds futures market to construct measures of anticipated and surprise movements in target federal funds rate; Decomposition of the change in the federal funds rate; Overview of predicting changes in the federal funds rate using 3-month Treasury bills.

The decentralized autonomous organization (DAO) represents a radically new way to manage databases. Since money and payments are all about managing databases and since banks play a central role in money and payments, DAO-based money and payments systems are potentially a disruptive force in the banking system--which includes central banks. One would normally expect regulatory frameworks to evolve with a changing technological landscape. However, the decentralized governance structure characteristic of DAOs renders it near impossible to regulate these entities directly--a property that makes them ideal vehicles to exploit regulatory arbitrage. In this article, I discuss some of the monetary policy implications of DAO-based money and payment systems. I highlight the prospect of a globally accessible DAO-based stablecoin that may conceivably end up financing a large fraction of global trade. To the extent that such a structure imposes systemic financial risk and to the extent it cannot be regulated directly, an alternative strategy is to offer a competing product. A central bank digital currency accessible to firms involved in the global supply chain may be one way to mitigate the systemic risk associated with an emergent, unregulated global stablecoin. [ABSTRACT FROM AUTHOR]

This paper uses an example to show that a model that fits the available data perfectly may provide worse answers to policy questions than an alternative, imperfectly fitting model. The author argues that, in the context of Bayesian estimation, this result can be interpreted as being due to the use of an inappropriate prior over the parameters of shock processes. He urges the use of priors that are obtained from explicit auxiliary information, not from the desire to obtain identification. [ABSTRACT FROM AUTHOR]

Comments on an article by Laurence Kotlikoff on the bankruptcy of the U.S. Argument on Kotlikoff's definition of bankruptcy in the article; Main components of the paper; Views on the idea of a bankrupt nation.

Two recent strands of research have contributed to our understanding of the effects of foreign exchange intervention: (i) the use of high-frequency data and (ii) the use of event studies to evaluate the effects of intervention. This article surveys recent empirical studies of the effect of foreign exchange intervention and analyzes the implicit assumptions and limitations of such work. After explicitly detailing such drawbacks, the paper suggests ways to better investigate the effects of intervention. [ABSTRACT FROM AUTHOR]

Svensson (2003) argues strongly that specific targeting rules--first-order optimality conditions for a specific objective function and model--are normatively superior to instrument rules for the conduct of monetary policy. That argument is based largely on four main objections to the latter, plus a claim concerning the relative interest-instrument variability entailed by the two approaches. The present paper considers the four objections in turn and advances arguments that contradict all of them. Then, in the paper's analytical sections, it is demonstrated that the variability claim is incorrect, for a neo-canonical model and also for a variant with one-period-ahead plans used by Svensson, providing that the same decisionmaking errors are relevant under the two alternative approaches. Arguments relating to general targeting rules and actual central bank practice are also included. [ABSTRACT FROM AUTHOR]

Presents a commentary on inflation targeting. Examination of different responses before and after inflation targeting to upward spikes in oil prices in 1978 and 1998; Application of double differences method to look at the difference in outcomes for inflation-targeting countries relative to non-inflation-targeting countries; Difference between the context for the conduct of monetary policy in Germany and what it is in the European Monetary Union.

Comments on the study conducted by Eric M. Leper and Tao Zha which compared the New Keynesian (NK) and vector autoregression (VAR) macroeconomic models used to analyze monetary policy. Failure of Leper and Zha to elaborate the features of NK and VAR models; Weaknesses of the empirical results of the study.

Focuses on the the role of banks in the American financial system in late 19th century. History of the banking system of the United States; Discussion on the real-bills doctrine; Details on the Bank of A. Levy and the Emigrant Savings Bank cases.

This article describes the origins and development of the federal funds market from its inception in the 1920s to the early 1950s. We present a newly digitized daily data series on the federal funds rate from April 1928 through June 1954. We compare the behavior of the funds rate with other money market interest rates and the Federal Reserve discount rate. Our federal funds rate series will enhance the ability of researchers to study an eventful period in U.S. financial history and better understand how monetary policy was transmitted to banking and financial markets. For the 1920s-30s, our series is the best available measure of the overnight risk-free interest rate, better than the call money rate that many studies have used for this purpose. For the 1940s-50s, our series provides new information about the transition away from wartime interest rate pegs culminating in the 1951 Treasury-Federal Reserve Accord. [ABSTRACT FROM AUTHOR]

The U.S. labor market contracted sharply during the Great Recession. The ensuing recovery has been sluggish and by some measures still incomplete. In this paper, we break down aggregate employment during the Recession and the recovery into changes across industries and occupations. There is a clear asymmetric pattern: The contraction is driven by sectors and the recovery by occupations. In particular, the contraction between 2008 and 2010 primarily reflects a steep decline in construction employment, partially mitigated by expansions in the food services, education, and health industries. The recovery first came from a gradual increase in low-skill occupation employment across all sectors but after 2012 from a pronounced increase in high-skill occupation employment across all sectors. This pattern of recovery is a continuation of the underlying trend of polarization across occupations, which commenced in the 1980s. [ABSTRACT FROM AUTHOR]

The European Central Bank (ECB) assigns greater weight to the role of money in its monetary policy strategy than most, if not all, other major central banks. Nevertheless, reflecting the view that the demand for money became unstable in the early 2000s, some commentators have reported that the ECB has "downgraded" the role of money demand functions in its strategy. This paper explains the ECB's monetary policy strategy and shows the considerable influence of Milton Friedman's contributions on the formulation of that strategy. The paper also provides new evidence on the stability of euro area money demand. Following a conjecture made by Friedman (1956), the authors assign a role to uncertainty in the money demand function. They find that although uncertainty is nonstationary and subject to wide swings, it is nonetheless mean reverting and has substantial effects on the demand for money. [ABSTRACT FROM AUTHOR]

This article summarizes some of the papers presented at the System Applied Microeconomics Conference organized and hosted by the Federal Reserve Bank of St. Louis on May 5-6, 2011. This annual conference brings together economists from the Federal Reserve District Banks across the Federal Reserve System and the Federal Reserve Board to present their latest economic research. [ABSTRACT FROM AUTHOR]

The authors devise an "ambition-adjusted" journal ranking based on citations from a short list of top general-interest journals in economics. Underlying this ranking is the notion that an ambitious economist wishes to be acknowledged not only in the highest reaches of the profession, but also outside his or her subfield. In addition to the conceptual advantages that they find in their ambition adjustment, they see two main practical advantages: greater transparency and a consistent treatment of subfields. They compare their 2008 ranking based on citations from 2001 to 2007 with a ranking for 2002 based on citations from 1995 to 2001. [ABSTRACT FROM AUTHOR]

This paper examines a tractable real business cycle model with idiosyncratic productivity shocks and binding credit constraints on entrepreneurs. The model shows how firm volatility increases in combination with credit market development. It further generates the observed comovement of credit and firm volatility with output at business cycle frequencies in response to aggregate productivity shocks. [ABSTRACT FROM AUTHOR]

This paper discusses the events surrounding the 2007-08 credit crunch. It highlights the period of exceptional macrostability, the global savings glut, and financial innovation in mortgage-backed securities as the precursors to the crisis. The credit crunch itself occurred when house prices fell and subprime mortgage defaults increased. These events caused investors to reappraise the risks of high-yielding securities, bank failures, and sharp increases in the spreads on funds in interbank markets. The paper evaluates the actions of the authorities that provided liquidity to the markets and failing banks and indicates areas where improvements could be made. Similarly, it examines the regulation and supervision during this time and argues the need for changes to avoid future crises. [ABSTRACT FROM AUTHOR]

The author reflects on the importance of predictability in monetary policy, basing on Bill Poole's paper on monetary policy and on more recent experiences of predictability in practice. He contends that Poole's active policy rules were more predictable and could reduce uncertainty, and the private sector rules of thumb ways of monetary policy can improve the operation of the economy.

This paper develops a generalization of the formulas proposed by Kuttner (2001) and others for purposes of measuring the effects of a change in the federal funds target on Treasury yields of different maturities. The generalization avoids the need to condition on the date of the target change and allows for deviations of the effective fed funds rate from the target as well as gradual learning by market participants about the target. The paper shows that parameters estimated solely on the basis of the behavior of the fed funds and fed funds futures can account for the broad calendar regularities in the relation between fed funds futures and Treasury yields of different maturities. Although the methods are new, the conclusion is quite similar to that reported by earlier researchers—changes in the fed funds target seem to be associated with quite large changes in Treasury yields, even for maturities of up to 10 years. [ABSTRACT FROM AUTHOR]

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]

The article discusses various reports published within the issue, including one on a monetary policy model estimated to fit British data and another on the relationship between components of the term structure of interest rates and monetary policy.

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]

Comments on a paper by Robert Shimer published in this same issue which measures the job-finding, separation, and job-to-job transition rates in the U.S. from 1948 to 2004. Findings of Shimer; Composition effects due to heterogeneous agents and movements in and out of the labor force; Conclusion of Shimer that the received wisdom about job destruction rises dramatically during recessions.

Comments on a paper by Robert G. King and Mau-Ting Lin published in this same issue which analyzes the desirability of various interest rate rules in a standard model of sticky prices. Types of shocks considered by King and Lin; Monetarist concerns discussed by the paper; Way in which the inflation-rule only destabilizes output.

Comments on a paper by James D. Hamilton, published in this same issue which argues that a linear statistical model with homoskedastic errors cannot capture the nineteenth-century notion of a recurring cyclical pattern in key economic aggregates. Questions raised by Hamilton in his paper; Dynamics of the unemployment rate according to Hamilton; Difference in empirical characterizations of the business cycle.

In this paper, the author develops and uses an original dataset collected from the internal discussion of the Federal Reserve's monetary policy committee (the Federal Open Market Committee [FOMC] transcripts) to examine questions about the Committee's behavior. The data show that Chairman Alan Greenspan's proposals, after Committee discussion, were nearly always adopted unmodified in the formal vote. Despite the external appearance of consensus with little disagreement over decisions and an official dissent rate of 7.5 percent, the data reveal that the rate of disagreement in internal Committee discussions was quite high-on the order of 30 percent for discussions of the short-term interest rate. And, under the assumption that FOMC voters assigned a higher priority to their preferences for the short-term interest rate than for the bias in the policy directive, it can be shown that this bias was important for achieving consensus, which supports and extends the results of Thornton and Wheelock (2000). Thus, the novel dataset described in this paper helps to shed some light on the internal workings of the FOMC in the Greenspan years. [ABSTRACT FROM AUTHOR]

During the housing bust many homeowners found themselves "underwater"--the amount they owed on their mortgages exceeded the value of the associated property--and they either could not or possibly chose not to stay current on their mortgage payments. As a consequence, sales of so-called distressed properties, often after a foreclosure, became commonplace. This spurred numerous research papers on various related issues. The authors' review summarizes the research findings on three topics: the impact of changes in housing prices on foreclosures; the impact of foreclosure on the sales price of the foreclosed house; and the impact of foreclosure on the sales prices of nearby houses. Not surprisingly, declining housing prices are associated with increasing foreclosure rates; however, various other factors, such as a job loss or expected housing prices, can also play an important role. This review highlights various theoretical and econometric issues that have raised doubts about the accuracy of estimated price impacts of foreclosures and led to numerous refinements of the subsequent empirical analysis. Estimates of the own foreclosure discount generally range from near zero to 28 percent, with most estimates greater than 12 percent. Estimates of the discount resulting from spillover effects of nearby foreclosed houses are generally less than 2 percent and diminish rapidly with distance. (JEL R31). [ABSTRACT FROM AUTHOR]

Comments on the article `Is There a `Credit Channel' for Monetary Policy,' by R. Glenn Hubbard, published in the May/June 1995 issue of Federal Reserve Bank of Saint Louis' `Review' magazine. Failure of the paper to present a general-equilibrium model of an economy with money, capital and a credit market fraction; Questions on the theoretical aspects of monetary growth models.

This paper investigates the effectiveness of forward guidance for the central banks of New Zealand, Norway, Sweden, and the United States. The authors test whether forward guidance improved market participants' ability to forecast future short-term and long-term rates relative to several benchmarks. They find some evidence that forward guidance improved market participants' ability to forecast short-term rates over relatively short forecast horizons for New Zealand, Norway, and Sweden but not the United States. However, the effects are typically small and frequently not statistically significant. Moreover, in no case are the results uniform across the benchmarks used. In addition, the authors find evidence of convergence of survey forecasters for New Zealand but less so for the other countries and no evidence of convergence for the United States. [ABSTRACT FROM AUTHOR]

No history of the St. Louis Fed would be complete without a chapter on its leadership in providing econ - omic data for the public. Today, this long-standing commitment to data service is encapsulated in one name: FRED®. FRED, Federal Reserve Economic Data, is the St. Louis Fed's main economic database. It is used by hundreds of thousands of economists, other researchers, market analysts, journalists, teachers, students, and members of the general public. FRED began about 20 years ago as a modest service provided by pre-Internet technology. Since then, it has continued to flourish and expand significantly in size and scope, usability and functionality, and number of users. It is known and valued around the world in many different ways by people who care about the numbers driving today's regional, national, and international econ - omies. FRED data have been incorporated into textbooks, blogs, social media, and research papers. [ABSTRACT FROM AUTHOR]

The author comments on the paper by Michael F. Gallmeyer et al examining the impact of monetary policy on long-term interest rates and the volatility of the long end of the yield curve. She commends the authors for devising an economic model with potential for explaining yield curves and volatility. She asserts that the exogenous inflation specification is too restrictive and it should allow a variable inflation-risk premium. She emphasizes the need to examine alternative interest rate rules.

The author comments on the paper by Ravi Bansal et al explaining asset pricing issues by specifying the inter-temporal structure of risks to put long-run risks into consumption and assets' cash flows and changing preferences to make the representative consumer care more about long-run risks. He thinks a representative agent's consumption Euler equation linking one-period real interest rate to consumption growth rate is the New Keynesian IS curve. He suggests Bansal's approach to macroeconomists.

Comments on a paper by Ellen McGrattan and Ed Prescott published in this same issue which shows that ignoring corporate intangible investments gives a distorted picture of the post-1990 U.S. economy. Characterization of the U.S. economy in the 1990s; Assumptions of perfect labor mobility across sectors; Chart showing private nonfarm business productivity growth from 1948-2000.

As the share of all income going to the top 1 percent has risen over the past four decades, so has the share of top incomes coming from labor income relative to capital income. The rise in labor income is mainly due to the explosion in executive compensation over the same period--mostly because of the increase in executives being paid with stocks, options, and bonuses. The principal-agent model explains the reason for such compensation instead of a flat salary. Yet hundreds of papers in economics, finance, accounting, and management have reached no consensus on whether executive compensation is efficient or whether empirically it conforms to the prediction of the principal-agent theory. In this article, we argue that this lack of consensus is due to two issues: The first is a measurement issue, and the second is that the exact prediction of the principal-agent model depends on many objects unobservable to the econometrician. We illustrate how using theory-based estimation together with a model-motivated measure of total compensation can help overcome these issues. Finally, using a model-consistent measure of compensation and theory-based estimation, we conclude that executive compensation broadly conforms to the principal-agent theory; however, each situation and the variables used have to be carefully modeled, identified, and estimated. [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]

This paper reviews some of the recent studies on international capital flows with a focus on the role of European global banks. It presents a revision to the commonly held "global saving glut" view that East Asian economies (along with oil-rich nations) were the dominant suppliers of capital that fueled the asset price boom in many parts of the world in the early 2000s. It argues that the role of funding costs and a "liberal" regulatory regime that allowed for an unprecedented expansion of the balance sheets of European banks was no less important. Finally, we describe the aftermath of the crisis in terms of some of the challenges faced by Europe as a whole and European banks in particular. [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]