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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.

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

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]

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]

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 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]

In their paper "Targeting versus Instrument Rules for Monetary Policy," McCallum and Nelson critique targeting rules for the analysis of monetary policy. Their arguments are rebutted here. First, McCallum and Nelson's preference to study the robustness of simple monetary policy rules is no reason at all to limit attention to simple instrument rules; simple targeting rules may have more desirable properties. Second, optimal targeting rules are a compact, robust, and structural description of goal-directed monetary policy, analogous to the compact, robust, and structural consumption Euler conditions in the theory of consumption. They express the very robust condition of equality of the marginal rates of substitution and transformation between the central bank's target variables. Indeed, they provide desirable micro foundations of monetary policy. Third, under realistic information assumptions, the instrument rule analog to any targeting rule that McCallum and Nelson have proposed results in very large instrument rate volatility and is also, for other reasons, inferior to a targeting rule. [ABSTRACT FROM AUTHOR]

This article reviews and explains the recent policy reactions of the Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan to the financial and macroeconomic turmoil caused by the COVID-19 pandemic. The financial and monetary policy actions of major central banks in the most recent crisis have, by some metrics, surpassed their responses to the Global Financial Crisis of 2007-09 in both swiftness and scope. [ABSTRACT FROM AUTHOR]

The Federal Reserve System (Fed) is a regular feature in the media. When the Fed communicates with the public, its focus is on forward guidance related to monetary policy--specifically, for achieving low unemployment and low inflation. Fed participants on the Federal Open Market Committee (FOMC) convey what they see as the likely path of policy, including changes in the federal funds rate, a standard monetary policy tool. Because financial markets find this information useful, news stories thoroughly cover Fed communication. However, such communication fails to explain the structure of the economy that disciplines how the FOMC achieves its objectives for employment and inflation. The FOMC necessarily conducts monetary policy based on assumptions about this structure. What is now implicit should be made explicit. Such explicitness by the FOMC is necessary for the public to understand the monetary standard that it has created. That is, the Fed needs to explain the framework it assumes to then explain how its actions translate into achievement of its objectives. Such transparency will be challenging. The standard Fed narrative implicitly assumes that a free-market economy and financial markets are inherently unstable. Economic instability originates in the private sector, and an independent Fed is required to mitigate this instability. Again, implicitly, the assumption is that the Fed understands the structure of the economy so that it knows the origin of instability and how its actions will offset that instability. Despite the Fed narrative, there is a need for a debate over the optimal monetary standard. In the 1960s, the monetarist-Keynesian debate raised the key issues relevant to the design of the optimal monetary standard. Is inflation a monetary or a nonmonetary phenomenon? What accounts for the simultaneous occurrence of monetary instability and real instability. Does the direction of causation go from monetary to real instability or vice versa? The intent of this article is to revive the earlier debate. To do so, it will be necessary to re-exposit monetarism in a way relevant to current central bank practice. To do so, I re-exposit monetarism in a way that is relevant to current central bank practice, using the term "Wicksellian monetarism" as the descriptive label. Such a debate is especially urgent at present given the FOMC's current policy of disinflation. The FOMC needs to articulate a monetary policy in terms of a long-term strategy (rule) that will restore price stability and then maintain that stability. How does current policy ensure that a declining rate of inflation will stop at 2 percent and then remain there? That is, for the long run, the policy needs to provide a stable nominal anchor. Such a policy should allow the FOMC to lower the federal funds rate to prevent a serious recession while maintaining credibility for a long-run policy to restore price stability. [ABSTRACT FROM AUTHOR]

This paper revisits the debate over the money supply versus the interest rate as the instrument of monetary policy. Using a dynamic stochastic general equilibrium framework, the authors examine the effects of alternative monetary policy rules on inflation persistence, the information content of monetary data, and real variables. They show that inflation persistence and the variability of inflation relative to money growth depend on whether the central bank follows a money growth rule or an interest rate rule. With a money growth rule, inflation is not persistent and the price level is much more volatile than the money supply. Those counterfactual implications are eliminated by the use of interest rate rules whether prices are sticky or not. A central bank's use of interest rate rules, however, obscures the information content of monetary aggregates and also leads to subtle problems for econometricians trying to estimate money demand functions or to identify shocks to the trend and cycle components of the money stock. [ABSTRACT FROM AUTHOR]

Comments on Lars Svensson's article "Targeting Versus Instrument Rules for Monetary Policy: What Is Wrong With McCallum and Nelson?," which appeared in the September/October 2005 issue of "Review (Federal Reserve Bank of Saint Louis)." Purpose of the article; Justification for the stated limitation of targeting rules; Views on Svensson's conclusions about the implications of consumption decisions for modeling central bank behavior.

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.

As a matter of arithmetic, the trends of US government debt and deficits will eventually result in an outrageously high government debt-to-GDP ratio. But when exactly will the United States hit the constraint of infeasibility and how exactly will policy adjust to it? This article considers fiscal dominance, which is the possibility that accumulating government debt and deficits can produce increases in inflation that “dominate” central bank intentions to keep inflation low. Is it a serious possibility for the United States in the near future? And how might various policies change (especially those related to the banking system) if fiscal dominance became a reality?. [ABSTRACT FROM AUTHOR]

This new wave of financial innovations has broad implications for society, banking, and central banking: Digital platforms can ease entry for financial services providers, increase transactional efficiency, and widen access to and participation in the financial system. They could also decrease the use of cash and alter the U.S. dollar's role as today's vehicle currency. [ABSTRACT FROM AUTHOR]

The article presents the author's insight regarding challenges for monetary policy that the European Monetary Union (EMU) faces. He states that EMU will find it difficult to ensure monetary policy stability if membership requirement will not be met in the union. He mentions that in order for the policy not continually be challenged by financial crisis, the central bankers should take into consideration the implication of monetary policy in the financial stability as well as the price stability.

The authors examine the experience of selected central banks that have used large-scale balancesheet expansion, frequently referred to as "quantitative easing," as a monetary policy instrument. The case studies focus on central banks responding to the recent financial crisis and Nordic central banks during the banking crises of the 1990s; others are provided for comparison purposes. The authors conclude that large-scale balance-sheet increases are a viable monetary policy tool provided the public believes the increase will be appropriately reversed. [ABSTRACT FROM AUTHOR]

The article presents the author's perspective on the study by Lars Svensson and Noah Williams concerning the design of optimal monetary policy under uncertainty using a Markov jump linear-quadratic (MJLQ) approach. He raises the issue about the model's assumption on central bank monetary policy behavior and the assumption of the state of knowledge in the private sector. He contends that the research misses a critical component in the context of the parameters of monetary policies.

The article presents the author's perspectives on the study by Lars Svensson and Noah Williams on addressing uncertainty in optimal monetary policy through experimentation using Markov jump linear-quadratic control algorithms in the U.S. He remarks that the study is an important contribution in analyzing Bayesian optimal monetary policy in an environment in which the central bank faces a set of competing models to update its probability assessments of the actual economic model.

This article discusses the linkages between two recent themes in economic research: "real time" data and replication. These two themes share many of the same ideas, specifically, that scientific research itself has a time dimension. In research using real-time data, this time dimension is the date on which particular observations, or pieces of data, became available. In work with replication, it is the date on which a study (and its results) became available to other researchers and/or was published. Recognition of both dimensions of scientific research is important. A project at the Federal Reserve Bank of St. Louis to place large amounts of historical data on the Internet holds promise to unify these two themes. [ABSTRACT FROM AUTHOR]

Discusses the transparency in the conduct of monetary policy from several perspectives. Factors behind the move to increased transparency on the part of central banks; Information on how the Bank of Canada become more transparent; Question of limits of transparency from a broader perspective.

Comments on central bank transparency. Misconception on transparency as the publication of central bank forecasts; Hypotheses about the effects of transparency for testing; Correlation between level of development and positive response to a survey regarding forecast disclosure.

Focuses on the mechanics of foreign exchange intervention by central banks. Types of foreign exchange intervention; Analysis of the method of dealing with counterparties by monetary authorities; Motivation for intervention decisions; Role of secrecy in intervention.

Discusses the significance of expectations from banking panics and sharp disturbances in financial markets. Details on inflationary expectations; Extent to which the market can predict central bank actions; Role of central bankers in creating and sustaining non-rational expectations.

Examines inflation-targeting regimes to see how having multiple objectives affects uncertainty about future price levels. Arguments on commonly proposed rules for inflation targeting; Derivation of optimal policy rules using alternative specifications of a central bank loss function; How central banks may overcome drawbacks of inflation-targeting regimes.

Sargent and Wallace (1981) published "Some Unpleasant Monetarist Arithmetic" 40 years ago. Their central message was that a central bank may not have the power to determine the long-run rate of inflation without fiscal support. In a policy regime where the fiscal authority is non-Ricardian, an attempt on the part of the central bank to lower inflation may end up backfiring. I develop a structural model to illustrate this result through the use of a diagram. In addition, I use the model to explain how low inflation, low interest rates, and high primary budget deficits can coexist. I also use the model to explain why it is easier for a central bank to lower inflation than to raise it. I conclude with some recommendations for state-contingent monetary policy. [ABSTRACT FROM AUTHOR]

Examines the performance contracts proposal which would provide the proper financing incentive for the central banker to pursue price stability. Determination of monetary policy; Influence of inflation and inflation expectations on output; Resolution of the time-inconsistency problem.

This article extends the work of Fawley and Neely (2013) to describe how major central banks have evolved unconventional monetary policies to encourage real activity and maintain stable inflation rates from 2013 through 2019. By 2013, central banks were moving from lump-sum asset purchase programs to open-ended asset purchase programs, which are conditioned on economic conditions, careful communication strategies, bank lending programs with incentives, and negative interest rates. This article reviews how central banks tailored their unconventional monetary methods to their various challenges and the structures of their respective economies. [ABSTRACT FROM AUTHOR]

The author reflects on the limitations of forward guidance on information disclosure on monetary policy by drawing a distinction between two dimensions of information policy: transparency regarding long-run inflation objective, and discretionary announcements used by central banks to substitute for transparency on inflation objective in the U.S. He asserts that forward guidance on interest rate policy is likely to be effective when it reinforces a well-formulated monetary policy strategy.

I survey monetary policy strategy, regulation, and central banks' mandates and independence. I do not think strongly negative interest rates, vastly expanded quantitative easing, or extensive forward guidance can or should stimulate in the next recession. I advocate a price-level target and that the Fed fix the spread between indexed and nominal debt. I argue for a large balance sheet of interest-paying reserves, achieved via a flat supply curve, though I argue that the Treasury should issue reserve-like debt as well to take up much of that role. Central banks should avoid the temptation toward ever-expanding roles including "macroprudential" policy, discretionary credit cycle management, asset price targeting, and using their regulatory power to advance social and political goals such as climate change and inequality. Only limited scope of action to areas of agreed technocratic competence will salvage central banks' and international institutions' useful independence. (JEL E52, E58, E61, G28). [ABSTRACT FROM AUTHOR]

The modern model of central bank communication suggests that central bankers prefer to err on the side of saying too much rather than too little. The reason is that most central bankers believe that clear and concise communication of monetary policy helps achieve their goals. For the Federal Reserve, this means to achieve its goals of price stability, maximum employment, and stable longterm interest rates. This article examines the various dimensions of Fed communication with the public and financial markets and how Fed communication with the public has evolved over time. We use daily and intraday data to document how Fed communication affects key financial market variables. We find that Fed communication is associated with changes in prices of financial market instruments such as Treasury securities and equity prices. However, this effect varies by type of communication, by type of instrument, and by who is doing the speaking. [ABSTRACT FROM AUTHOR]

We characterize various currencies according to their control structure, focusing on cryptocurrencies such as Bitcoin and government-issued fiat money. We then argue that there is a large unmet demand for a liquid asset that allows households and firms to save outside of the private financial sector. Central banks could offer such an asset by simply allowing households and firms to open accounts with them. Finally, we conclude that a central bank will not issue cryptocurrencies in the sense of a truly decentralized and permissionless asset that allows users to remain anonymous. [ABSTRACT FROM AUTHOR]

Neo-Fisherites argue that conventional central banking wisdom has inflation control wrong, in that the way to increase (reduce) inflation is to increase (reduce) the central bank's nominal interest rate target. This article shows how two conventional macroeconomic monetary models-a New Keynesian (NK) model and a segmented markets model-exhibit neo-Fisherian properties. Thus, neo-Fisherism should actually be the foundation for conventional inflation control. [ABSTRACT FROM AUTHOR]

The sudden collapse of oil prices poses a challenge to inflation-targeting central banks in oil-exporting economies. In this article, the authors illustrate this challenge and conduct a quantitative assessment of the impact of changes in oil prices in a small open economy in which oil represents an important fraction of its exports. They build a monetary, three-sector, dynamic stochastic general equilibrium model and estimate it for the Colombian economy. They model the oil sector as an optimal resource extracting problem and show that in oil-exporting economies the macroeconomic effects vary according to the degree of persistence of oil price shocks. The main channels through which these shocks pass to the economy come from the real exchange rate, the country risk premium, and sluggish price adjustments. Inflation-targeting central banks in such economies face a policy dilemma: raise the policy rate to fight increased inflation coming from the exchange rate passthrough or lower it to stimulate a slowing economy. (JEL C61, E31, E37, E52, F41). [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]

Several commentators have been concerned about the possibility that the euro area may be experiencing disinflation with the risk of deflation. However, the euro area is not the only economy navigating the risky waters of low inflation. Several other advanced economies have recently experienced below-target inflation as well as outright deflation. In this article, the authors collect data for nine advanced economies and document several facts about the behavior of inflation during the 2002-14 period. First, they show that the relationship between inflation rates and short-term rates displays similar changes across advanced economies--with and without central bank programs designed to increase the size of their balance sheets (e.g., large-scale asset purchases). Second, they describe recent indications that headline and core inflation are below target for individual countries. They then discuss various explanations for this trend (global factors, output gaps, and changes in inflation expectations), showing that there is some important heterogeneity across countries. Finally, they show that while output has become even more synchronized across countries since 2008, the cross-country correlation of inflation is no longer higher than the cross-country correlation of output. [ABSTRACT FROM AUTHOR]

By providing guidance about future economic developments, central banks can affect private sector expectations and decisions. This can improve welfare by reducing private sector forecast errors, but it can also magnify the impact of noise in central bank forecasts. I employ a model of heterogeneous information to compare outcomes under opaque and transparent monetary policies. While better central bank information is always welfare improving, more central bank information may not be. (JEL E52, E58) [ABSTRACT FROM AUTHOR]

The Federal Reserve is not formally inflation targeting. Nevertheless, it is commonly believed to be an implicit inflation targeter. The evolution to inflation targeting occurred because central banks, most importantly the Federal Reserve, demonstrated that monetary policy could control inflation. As central banks' credibility for keeping inflation low increased, policy actions became increasingly focused on affecting the growth rate of employment or the unemployment rate. The author argues that this change in emphasis is unlikely to generate positive benefits; more importantly, it endangers the continued effectiveness, and perhaps even the viability, of inflation targeting. [ABSTRACT FROM AUTHOR]

In 1913, Congress purposefully created the Federal Reserve as an independent central bank, which created a fundamental tension: how to ensure the Fed remains accountable to the electorate without losing its independence. Over the years, there have been changes in the Fed's structure to improve its independence, credibility, accountability, and transparency. These changes have led to a better institutional design that makes U.S. policy credible and based on sound economic reasoning, as opposed to politics. In times of financial and economic crisis, there is an understandable tendency to reexamine the structure of the Federal Reserve System. A central bank's independence, however, is the key tool to ensure a government will not misuse monetary policy for short-term political reasons. (JEL E52, E58) [ABSTRACT FROM AUTHOR]

The authors extend a standard New Keynesian model to incorporate heterogeneity in spending opportunities and two sources of (potentially time-varying) credit spreads and to allow a role for the central bank's balance sheet in equilibrium determination. They use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions, and to consider additional dimensions of central bank policy—variations in the size and composition of the central bank's balance sheet and payment of interest on reserves—alongside the traditional question of the proper choice of setting an operating target for an overnight policy rate. The authors also give particular attention to the special problems that arise when the policy rate reaches the zero lower bound. They show that it is possible within a single unified framework to identify the criteria for policy to be optimal along each dimension. The suggested policy prescriptions apply equally well when financial markets work efficiently as when they are substantially disrupted and interest rate policy is constrained by the zero lower bound. [ABSTRACT FROM AUTHOR]

By providing guidance about future economic developments, central banks can affect private sector expectations and decisions. This can improve welfare by reducing private sector forecast errors, but it can also magnify the impact of noise in central bank forecasts. I employ a model of heterogeneous information to compare outcomes under opaque and transparent monetary policies. While better central bank information is always welfare improving, more central bank information may not be. [ABSTRACT FROM AUTHOR]

Discusses the transparency of a central bank to fulfill the accountability requirements of a democracy. Demands for unlimited, absolute transparency as a necessary counterpart of independence; Transparency and efficiency in monetary policy; Public announcement of a quantitative definition of price stability.

Discusses the implications of central bank transparency for the formation of U.S. monetary policy. Fundamentals of macroeconomics equilibrium; Cases of miscommunication; Examination of the economic purpose of disclosure.

Presents information on designing a central bank law. Principles for designing an optimal central bank law; Inflation target; Discussion on central bank independence; Organization of the U.S. Federal Reserve System; Importance of transparency.

Examines modern central banking with a focus on the U.S. Federal Reserve System and the European Central Bank. Structure and appointment process of the key policymakers at the central banks; Tasks of central banks; Goals of monetary policy. INSETS: THE PATH TO MONETARY UNION;INSTITUTIONS OF THE EUROPEAN UNION;PRESS RELEASES FOLLOWING POLICY MEETINGS OF THE FOMC AND ....

Evaluates the degree of transparency about the economic models used by contemporary central banks and about their objective functions. Haziness about the economic model used for making policy decisions; Existence of a bias within the framework of a Lucas-type expectations-augmented Phillips curve; Implications for degree of flexibility in targeting inflation for real rates of interest.

Focuses on how central banks and United States Federal Reserve banks should conduct monetary policy. Guiding principles for central banks; Implications for the role of a central bank; Assessment of the institutional features of the Federal Reserve.

Provides information on the correlation of changes in foreign exchange reserves with intervention from central banks in the United States. Information on the role of central bank interventions on exchange rate volatility; Reasons of countries for holding international reserves; Purposes of the foreign exchange intervention; Difference of the changes in foreign exchange reserves from intervention.

Employs empirical studies to reveal inflation experience and economic growth of countries with central banks independent from government control. Policy conflict implication; Usefulness of independent central banks regarding economic performance.