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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 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.

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.

This paper constructs daily measures of the real interest rate and expected inflation using commodity futures prices and the term structure of Treasury yields. We find that commodity futures markets respond to surprise increases in the federal funds rate target by raising the inflation rate expected over the next 3 to 9 months. There is no evidence that the real interest rate responds to surprises in the federal funds target. The data from the commodity futures markets are highly volatile; we show that one can substantially reduce the noise using limited information estimators such as the median change. Nevertheless, the basket of commodities actually traded daily is quite narrow and we do not know whether our observable rates are closely connected to the unobservable inflation and real rates that affect economywide consumption and investment decisions. [ABSTRACT FROM AUTHOR]

Presents a survey of literature on the relationship between inflation and economic growth. Review of the past decades' pictures of inflation and growth; High inflation crises and growth.

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 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]

US fiscal and monetary policies implemented during the COVID-19 pandemic have been likened to those often adopted during wars. This article compares macroeconomic policies of the pandemic period with those of major US wars since the Civil War. Inflation often surges during wars, as it did in the second year of the pandemic, and the wartime experiences can provide insights about the relative scale and persistence of inflation associated with sudden, large increases in government expenditures, such as the fiscal response to the COVID-19 pandemic. The article describes fiscal and monetary policies in each war and postwar period and traces differences in the relationships between the growth in government debt, the money stock, and inflation across the episodes to differences in the prevailing monetary regime and other institutional arrangements. The evidence from US wars suggests that the extent of government spending and the means used to finance that spending can have a significant impact on inflation outcomes. Substantial monetary financing of large increases in government spending was a characteristic of most major wars and a key driver of inflation. Further, the historical record reveals that postwar periods can be disruptive, with sharp fluctuations in economic activity and inflation, and that quick restoration of price stability requires recalibration of fiscal and monetary policy that often has been politically and technically challenging. [ABSTRACT FROM AUTHOR]

In this paper the authors report the results of the estimation of a rich dynamic stochastic general equilibrium (DSGE) model of the U.S. economy with both stochastic volatility and parameter drifting in the Taylor rule. They use the results of this estimation to examine the recent monetary history of the United States and to interpret, through this lens, the sources of the rise and fall of the Great Inflation from the late 1960s to the early 1980s and of the Great Moderation of business cycle fluctuations between 1984 and 2007. Their main findings are that, while there is strong evidence of changes in monetary policy during Chairman Paul Volcker's tenure at the Federal Reserve, those changes contributed little to the Great Moderation. Instead, changes in the volatility of structural shocks account for most of it. Also, although the authors find that monetary policy was different under Volcker, they do not find much evidence of a big difference in monetary policy among the tenures of Chairmen Arthur Burns, G. William Miller, and Alan Greenspan. The difference in aggregate outcomes across these periods is attributed to the time-varying volatility of shocks. The history for inflation is more nuanced, as a more vigorous stand against it would have reduced inflation in the 1970s, but not completely eliminated it. In addition, they find that volatile shocks (especially those related to aggregate demand) were important contributors to the Great Inflation. [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 November 2007, the Federal Open Market Committee (FOMC) announced a change in the way it communicates its view of the economic outlook: It increased the frequency of its forecasts from two to four times per year, and it increased the length of the forecasting horizon from two to three years. The FOMC does not release the individual members' forecasts or standard measures of consensus such as the mean or median. Rather, it continues to release the forecast information as a range of forecasts, both the full range between the high and the low and a central tendency that omits the extreme values. This paper uses individual forecaster data from the Survey of Professional Forecasters (SPF) to mimic the FOMC's method for creating their central tendency. The authors show that the midpoint of the central tendency of the SPF is a reliable measure of the consensus, suggesting that the FOMC reporting method is also a reliable measure of consensus. For the dates when both are available, the authors also compare the relative forecast accuracy of the FOMC and SPF consensus forecasts for output growth and inflation. Overall, the differences in forecast accuracy are too small to be statistically significant. [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]

Opinion. Presents a critique of the paper `Inflation and Growth,' presented by Robert J. Barro, to the Federal Reserve Bank of Saint Louis' 1996 Economic Policy Conference. Focus on the empirical relationship between inflation and economic growth; Theory underlying the equation; Theory underlying the estimation.

During the pandemic, there have been unprecedented increases in the cost of shipping goods accompanied by delays and backlogs at the ports. At the same time, import price inflation has reached levels unseen since the early 1980s. This has led many to speculate that the two trends are linked. In this article, we use new data on the price of shipping goods between countries to analyze the extent to which increases in the price of shipping can account for the rise in U.S. import price inflation. We find that the pass-through of shipping costs is small. Nevertheless, because the rise in shipping prices has been so extreme, it can account for between 3.60 and 5.87 percentage points per year of the increase in import price inflation during the post-pandemic period. [ABSTRACT FROM AUTHOR]

Debt crises in emerging markets have been linked to large fiscal deficits, high inflation rates, and large devaluations. This article studies a sovereign default model with domestic fiscal and monetary policies to understand Argentina's experience during the 2000s commodity boom (2005-2017), following the default of 2001. The model suggests that domestic policies played a critical role in Argentina's poor economic performance. Despite exceptionally favorable terms of trade, a rise in government spending led to higher taxation, inflation and currency depreciation, and lower output. Economic performance would have been worse had Argentina followed a strict, rather than accommodative, monetary policy without curbing its expansionary fiscal policy. Finally, limited access to international credit markets during this episode did not appear to play a significant role. [ABSTRACT FROM AUTHOR]

Opinion. Comments on the paper `Inflation and Growth: In Search of a Stable Relationship,' presented by Michael Bruno and William Easterly, to the Federal Reserve Bank of Saint Louis' 1996 Economic Policy Conference. Focus on the relationship between inflation and economic growth.

Opinion. Presents a critique of the paper `Inflation and Growth,' presented by Robert J. Barro, to the Federal Reserve Bank of Saint Louis' 1996 Economic Policy Conference. Focus on the empirical relationship between inflation and economic growth.

Opinion. Comments on the paper `Inflation and Growth: In Search of a Stable Relationship,' presented by Michael Bruno and William Easterly, to the Federal Reserve Bank of Saint Louis' 1996 Economic Policy Conference. Focus on the relationship between inflation and economic growth.

Inflation expectations constitute important components of macroeconomic models and monetary policy rules. We investigate the relative performance of consumer, professional, market-based, and model-based inflation forecasts. Consistent with the previous literature, professional forecasts most accurately predict one-year-ahead year-over-year inflation. Both consumers and professionals overestimate inflation over their respective sample periods. Market-based forecasts as measured by the swap market breakeven inflation rates significantly overestimate actual inflation; Treasury Inflation-Protected Securities market breakeven inflation rates exhibit no significant bias. We find that none of the forecasts can be considered rationalizable under symmetric loss. We also find that each forecast has predictive information that is not encompassed within that of another. [ABSTRACT FROM AUTHOR]

We investigate the role supply chain disruptions during the COVID-19 pandemic played in U.S. producer price index (PPI) inflation. We exploit pre-pandemic cross-industry variation in sourcing patterns across countries and interact it with measures of international supply chain bottlenecks during the pandemic. We show that exposure to global supply chain disruptions played a significant role in U.S. cross-industry PPI inflation between January and November 2021. If bottlenecks had followed the same path as in 2019, PPI inflation in the manufacturing sector would have been 2 percentage points lower in January 2021 and 20 percentage points lower in November 2021. [ABSTRACT FROM AUTHOR]

This article describes the circumstances of and motivations for the quantitative easing programs of the Federal Reserve, Bank of England, European Central Bank, and Bank of Japan during the recent financial crisis and recovery. The programs initially attempted to alleviate financial market distress, but this purpose soon broadened to include achieving inflation targets, stimulating the real economy, and containing the European sovereign, debt crisis. The European Central Bank and Bank of Japan focused their programs on direct lending to banks—reflecting the bank-centric structure of their financial systems—while the Federal Reserve and the Bank of England expanded their respective monetary bases by purchasing bonds. [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.

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 presents the author's views on an article on the U.S. Congressional Budget Office's (CBO's) economic forecast method by Robert W. Arnold, published within this issue. An approach for projecting potential output using an assumption of the inflation rate of unemployment is presented. The author cites the CBO's Keynesian perspective on the economic process. He criticizes the absence of tools in the CBO's method for measuring permanent shocks to gross domestic product (GDP).

The authors use data from the Gallup World Poll to analyze what determines individual assessments of past, present, and future personal and country well-being. These measures allow the analysis of two dimensions of happiness data not previously examined in the literature: the better-than-average effect and optimism. The authors find that individuals tend to evaluate their personal well-being as being better than their country's and tend to expect that their future well-being will improve. The authors also analyze the impact of inflation and unemployment on these subjective measures and find that both variables have a negative effect on individuals' assessments of past and present well-being for themselves and their country; in contrast with other studies, however, they do not find that the effect of unemployment is significantly different from that of inflation. [ABSTRACT FROM AUTHOR]

The article presents the author's comment on the study by Marek Jarociński and Frank R. Smets on house prices and monetary policy in the U.S. The author remarks that the study briefly show that the recent U.S. housing boom is explained by a combination of increases in housing demand and loose monetary policy. He notes that the study also shows that housing demand shocks have a very limited impact on the overall volatility of real growth and inflation.

There has been a resurgence of interest in dynamic factor models for use by policy advisors. Dynamic factor methods can be used to incorporate a wide range of economic information when forecasting or measuring economic shocks. This article introduces dynamic factor models that underlie the data-rich methods and also tests whether the data-rich models can help a benchmark autoregressive model forecast alternative measures of inflation and real economic activity at horizons of 3, 12, and 24 months ahead. The authors find that, over the past decade, the data-rich models significantly improve the forecasts for a variety of real output and inflation indicators. For all the series that they examine, the authors find that the data-rich models become more useful when forecasting over longer horizons. The exception is the unemployment rate, where the principal components provide significant forecasting information at all horizons. [ABSTRACT FROM AUTHOR]

Examines how monetary policy transparency is associated with inflation and output in a cross-section of several countries. Regimes of transparency; Measure of explanations of forecasts and forward-looking analysis; Transparency in forecasting and average inflation.

Proposes a model that offers an explanation for facts about the United States inflation time series. Time-series characteristics exhibited in the inflation data from 1947 to 1998; Features of the proposed macroeconomic model; Inflation dynamics.

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 issues regarding the implementation of the policy by the Bank of England Monetary Policy Committee (MPC) in Great Britain. Determination of whether the two-year policy horizon set by the MPC is optimal for their inflation targeting approach; Appropriateness of the MPC practice to condition its inflation forecast; Extent to which policymakers should respond to asymmetric risks in inflation forecasts.

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.

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 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.

Examines the impact of inflation on the distribution of wage shocks in the United States. Description of the wage-setting process in large firms; Use of the annual private salary data from a survey conducted by the Federal Reserve Bank of Cleveland in Cincinnati; Distributional effects of inflation; Impact of unemployment and changes in returns to education on wage-change distributions; Conclusion.

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]

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.

Investigates the correlation between total industry capacity utilization rate and inflation within individual industries. Examination of capacity utilization rate data and price data for 23 industrial sectors; Provision of insight about the relationship between the capacity utilization rate and price changes.

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.

In October 1979, Federal Reserve Chairman Paul Volcker persuaded his Federal Open Market Committee (FOMC) colleagues to adopt a new policy framework that (i) accepted responsibility for controlling inflation and (ii) implemented new operating procedures to control the growth of monetary aggregates in an effort to restore price stability. These moves were strongly supported by monetarist-oriented economists, including the leadership and staff of the Federal Reserve Bank of St. Louis. The next three years saw inflation peak and then fall sharply but also two recessions and considerable volatility in interest rates and money supply growth rates. This article reviews the episode through the lens of speeches and FOMC meeting statements of Volcker and St. Louis Fed president Lawrence Roos and articles by Roos's staff. The FOMC adopted monetarist principles to establish the Fed's anti-inflation credibility, but Volcker was willing to accept deviations of money growth from the FOMC's targets, unlike Roos, who viewed the targets as sacrosanct. The FOMC abandoned monetary aggregates in October 1982 but preserved the Fed's commitment to price stability. The episode illustrates how Volcker used a change in operating procedures to alter policy fundamentally and later adapt the procedures to changed circumstances without abandoning the foundational features of the policy. [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.