e d i t e d b y

JOHN H. COCHRA NEJOHN B. TAYLOR

STRATEG I ESfo r

MON ETARYPOLICY

Index

adjusted Taylor rule, 224–25, 236Adrian, Tobias, 76Afonso, Gara, 182Agarwal, R., 54aggregate demand, 94

shocks, 327aggregate growth, consumption and,

315aggregate production, 313aggregate shocks, 313aggregate technology, 320AIG, 307AIT. See average inflation targetingAlphabet, 266Altavilla, Carlo, 50Amano, Robert, 328Amazon, 266American Economic Association, 2Anbil, S., 183Andolfatto, David, 215Armenter, Roc, 182asset prices, Bernanke on, 272average inflation targeting (AIT)

dovish policies and, 120–21evaluation of, 327–28PLT and, 331policies, 106Reifschneider-Williams rule and, 134,

165–66shock absorption and, 329static, 119–23, 129, 145, 145fWilliams on, 165–66

BA rule, 229federal funds rate and, 228fmeasure of, 230fperformance of, 239–41

bailouts, 307

balance sheetof Federal Reserve, 159, 163, 177–78, 272,

284, 302Plosser on, 273uncertainty and, 272–73

balanced-approach rule, 253–54of Federal Reserve, 223

balance-of-risk assessments, of Federal Reserve, 276–77

Ball, L., 219, 237Banegas, A., 183Bank of Canada, 323Bank of Japan, 41, 79–80Bank of New York Mellon, 185bank profits, 91bankruptcy, 307Banque de France, 24Basel requirements, 212BEA. See Bureau of Economic AnalysisBenhabib, J., 108, 114Bernanke, Ben, 20, 36, 94, 107–9, 165, 170

on asset prices, 272on central banks, 37–38on QE, 272on temporary price-level targeting,

346–47Bitcoin, 99Blue Chip Economic Indicators, 232fBoard of Governors, on interest rate rules,

218bonds

inflation-linked, 42n8, 45nominal, 45price pegging program, 28–29real, 45

Bordo, Michael, 20, 29, 71, 81, 357, 359–60Borio, C., 175borrowed funds, 189

380 Index

breakeveninflation, 12inflation expectations and, 46–48synthetic, 45, 46f, 69vanilla, 46f

Bretton Woods, collapse of, 3Brunnermeier, M. K., 49Buiter, W. H., 36, 54Bullard, Jim, 170–71, 214, 358, 364Bureau of Economic Analysis (BEA), 280, 300Burns, Arthur, 260, 261business cycle theory, 25

output growth and, 315variability in, 361

Caballero, R. J., 56, 175call options, 67Calomiris, Charlie, 101Canzoneri, M., 40Capital Asset Pricing Model (CAPM), 264Carney, Mark, 23cash flows

discount rate of, 264free, 265–66future free, 264

cash hoarding, 29–30, 61cash-arbitrage argument, 156cashless limit, negative interest rate policy

in, 50–53Cato Journal, 97, 300CBO. See Congressional Budget OfficeCCTW model, 241CEA. See Council of Economic Adviserscentral banks, 3–4, 21, 23

Bernanke on, 37–38core power of, 178credibility of, 31, 357deviation of rules by, 217–18on discretion, 248ELB and, 131independence of, 33, 163inflation and, 40, 329inflation targeting by, 31, 289interest rates and, 104lower bounds and, 105output gaps and, 329price stability and, 100reserve accounts at, 156short-term nominal interest rate and,

110–11Taylor on, 304–5in United States, 169–70

central payment system, federal reserve and, 267–68

Chen, H., 175China, fiscal shocks in, 43–44Christiano, L., 219, 237–38, 241, 254Cieslak, A., 268Clarida, Richard, 20–26, 99, 108, 171–72,

324, 365on Federal Reserve, 302

Cleveland Fed, 352n11CMR14 model, 241Cochrane, John, 25, 93, 166, 169, 252, 267

on financial crisis, 305on forward guidance, 358–59

coefficientson inflation expectations, 326fon lagged inflation, 326f

Coenen, Günter, 167Cogan, J., 241cohort

consumption by, 317fendowment profiles mass by, 313flabor force participation by, 316flabor income mass by, 317fleisure decisions by, 316fnet asset-holding mass by, 318f

commercial paper rate, Federal Reserve and, 206

Congressional Budget Office (CBO), 5, 227output gap, 232

constrained discretion, 20Consumer Price Index (CPI), 42n9, 44–45

caps, 69synthetic breakevens and, 69in United States, 47–48

consumptionaggregate growth and, 315by cohort, 317fof households, 315life cycle, 320monetary policy and, 95–96See also personal consumption expenditures

core power, 178corridor system, 179f

discount rate in, 200interest rates in, 200for short-term interest rates, 178–79

cost-push shock, 236Council of Economic Advisers (CEA), 260CPI. See Consumer Price Indexcredibility

of central banks, 31, 357earning, 331–32of Federal Reserve, 161, 331–32of forward guidance, 40Levin on, 357

Index 381

credit cycle, Federal Reserve and, 305–6credit market

household, 314nominal GDP and, 312reallocation by, 316

Crowe, Chris, 21Crump, Richard, 76, 338Cúrdia, V., 175currency

dual-currency system, 54electronic, 29–30, 54–55exchange rates, 54–55foreign, 57hoarding of, 29–30, 61magnetic stripes in, 54paper, 53–58, 61–62, 84size of, 214See also digital cash

The Curse of Cash (Rogoff), 83Cwik, T., 241

Dallas Fed, 335on inflation expectations, 339–40on productivity, 360–61on structural forces, 340–41

Dallas Fed Trimmed Mean, 335–36Daly, Mary, 358–59, 361–62, 365D’Amico, S., 47data dependence, 5–8

defining, x, 352of federal funds rate, 6–7forms of, xmonetary policy and, 6–7in rules-based frameworks, xiin United States, 7Williams on, 274

Davies, S., 54debt beta, 265debt destruction, 36–39deflation, 359–60Dell’Ariccia, G., 58demand shocks, 104, 115–16

impulse response functions and, 137finterest rate rule with, 112n5monetary policy and, 154tnegative, 136output gap and, 136–37positive, 137

Democrats, fiscal policy of, 39deposit rates, 167difference rule, 218digital cash, 93–95, 357–58

accounts, 81–82design principles for, 81

ELBs and, 83–85establishment of, 81financial crisis and, 85–86financial stability and, 85–86implementation of, 97–98as medium of exchange, 86practical steps for, 86–87as store of value, 86–87

digital savings accounts, 95discount rate

borrowed reserves and, 182fof cash flows, 264in corridor system, 200federal funds rate and, 179, 180f, 182f,

200–201Federal Reserve, 200maturities and, 265n1notation for, 265n1

discount window, Federal Reserve, 179–81“Discretion vs. Policy Rules in Practice”

(Taylor), 4disinflation, Volcker, 256, 331–32, 357disruption, 341, 360Dodd-Frank act, 305–6, 363dot plots, 281

FOMC, 284fhypothetical, 285

dovish policiesAIT and, 120–21on interest rates, 118–19

Draghi, Mario, 23dual-currency system, 54dual-mandate objectives, 5–6dynamic first-difference rule, 224dynamic rules, 170dynamic stochastic general equilibrium, in

macroeconomic models, 208

ECB. See European Central Bankeconomic expansion, 162–63economic output, growth in, 162economic recovery

adequacy of, 71–73Federal Reserve and, 73–81, 85QE and, 80fregime change and, 161in United States, 72fV-shaped, 92–93, 101

The Economist, 266education, labor market and, 337Edwards, Sebastian, 23, 208–9effective lower bounds (ELBs), 70

binding, 116central banks and, 131

382 Index

effective lower bounds (ELBs) (continued)digital cash and, 83–85mitigation of, 83–85

Eggertsson, G., 39, 109, 175Eichenbaum, M., 219, 237–38, 254Eisler, R., 30, 55, 61ELBs. See effective lower boundselectronic currency, 29–30, 54–55electronic payments, 156–57Employment Report, 275endowment profiles mass, by cohort, 313fequity beta, 265equity-share contracting, 314–15Erceg, Chris, 95–96, 357EU. See European UnionEuler equations

in New Keynesian model, 155for output gap, 110

Euribor rate, 157European Central Bank (ECB), ix–x, 81, 178

fine-tuning operations of, 210on forward guidance, 167interest rates of, 157QE by, 35

European Union (EU)interest rates in, 28, 157negative interest rate policy in, 49–50,

57–58, 157–58, 167Eusepi, Stefano, 338Evans, Charlie, 165, 237–38, 254Evans rule, 270excess reserves

federal funds rate and, 183finterest on, 183f

exchange ratescurrency, 54–55fixing, 167

expectations theory, 290See also inflation expectations

Facebook, 266Farhi, E., 56, 175FD rule

deviations from, 229federal funds rate and, 228f, 235fFederal Reserve on, 224inflation and, 242measure of, 230foptimizing, 240outcomes under, 246performance of, 239–41

FDdyn, 224dynamic simulation of, 234federal funds rate and, 235f

Federal Deposit Insurance Corporation, 183federal funds rate

BA rule and, 228fborrowed reserves and, 182fcuts, 324daily effective, 187fdata dependence of, 6–7determination, 181f, 184fdeviations, 226fdiscount rate and, 179, 180f, 182f, 200–201excess reserves and, 183fFD rule and, 228f, 235fFDdyn and, 235fFederal Reserve and, 195before financial crisis of 2007–2009, 195Fisher on, 301FOMC on, 197, 278, 335forecasts of, 278–80historical, 232IOER and, 183f, 184, 186lending volume and, 187flonger-run expectations, 15fmarket quotes and, 10fmarket-implied probability distribution

of, 11NPP rule and, 228fPCE deflator and, 233fPL rule and, 231f, 233fprojections of, 10frules and, 228fsetting of, 203–4T93 rule and, 228f, 231f, 233fT93adj rule and, 231f, 233fTaylor rule and, 226ftri-party repo rate and, 190

Federal Home Loan Banks (FHLBs), 182lending from, 186

Federal Open Market Committee (FOMC), 5–6, 70, 77, 155, 171, 180, 205–6, 303

accountability of, 350on central tendencies, 281confidence intervals of, 281, 284fdot plots, 284fon federal funds rate, 197, 278, 335Federal Reserve and, 275–76on floor system, 197forecasts of, 277–78framework decision of, 347GDP growth and, 278on inflation, 8finflation outcomes and, 279on inflation targeting, 346–47, 351on interest rate rules, 218mandate of, 5n7

Index 383

minutes of, 176on monetary policy, 278, 284f, 345–46negative feedback loops and, 273projections of, 324public comments of, 276on QE, 74–75review of, 345SEP and, 277–78, 281on uncertainty, 350on unemployment rate, 72f

Federal Reserve, xiii, xv, 21, 94–95activist policy of, 271–72balance sheet of, 159, 163, 177–78, 272,

284, 302balanced-approach rule of, 223borrowing of, 209challenges of, 309–10Clarida on, 302commercial paper rate and, 206credibility of, 161, 331–32deviations from rules of, 227–35discount rate, 200discount window, 179–81drivers affected by, 265dual mandate of, 271, 274, 279–80economic projections of, 282teconomic recovery and, 73–81, 85on FD rule, 224federal funds rate and, 195after financial crisis of 2007–2009, 163financial markets and, 269, 305–6financial stability and, 271, 305–6floor system of, 196–97, 201FOMC and, 275–76forecasting of, 274, 277–85freedom of, 208Friedman on, 28–29on futures, 10during Great Moderation, 270implementation procedures, 198improvement of, 275–76incentives and, 25independence of, 163–64, 365on inflation, 100inflation expectations and, 274, 339–40inflation targeting by, 342inside information of, 275–76on interest rate rules, 222–25, 301–2on interest rates, 158, 194macroeconomic models and, 235–47mandate creep of, 271–73market perceptions of, 296, 302–3monetary policy of, ix, 161, 177–78, 195nominal GDP targeting and, 198

nominal growth and, 296objectives of, 173–74, 200, 270–71overnight loans of, 173overreacting of, 274ownership of, 38policy statements of, 276–77, 300policy tools of, 270–71preeminence of, 161–62on price-level targeting rule, 229QE and, 33–34, 211, 271–72reserve balances and, 159freserves at, 87review of, ix, xvi, 309, 323risk assessment of, 280risk premia and, 267securities holdings of, 175fShultz on, 307size of, 218stock market and, 271strategy selection of, 309–10sufficiency of, 41survey data, 9n12in taper tantrum, 272toolbox of, 73–81uncertainty and, 267–68valuations and, 267–68weekly liabilities, 189f

Federal Reserve Bank of Chicago, 364Federal Reserve Bank of New York, 196,

204–5, 274Ferrero, A., 175FHLBs. See Federal Home Loan Banksfiat money system, 195Filardo, Andy, 213, 360, 362–63financial crisis, 324

Cochrane on, 305digital cash and, 85–86See also Great Recession

financial crisis of 2007–2009, 161federal funds rate before, 195Federal Reserve after, 163monetary policy and, 363

financial marketsFederal Reserve and, 269, 305–6monetary policy and, 8–13signals and noise in, 8–13

financial stabilitydigital cash and, 85–86Federal Reserve and, 271, 305–6negative interest rate policy and, 58–59

financial wealth, Gini coefficients, 318fine-tuning operations, of ECB, 210firm value, 264firm-specific risk, 263–64

384 Index

fiscal councils, 38–39fiscal policy

of Democrats, 39monetary policy and, 162–64of Republicans, 39in US, 39

fiscal shocksin China, 43–44in United States, 43–44

Fisher, Peter, 92, 203on federal funds rate, 301

Fixed Income Clearing Corporation, 186floor system

of Federal Reserve, 196–97, 201FOMC on, 197interest rates in, 200

FOMC. See Federal Open Market Committeeforeign currency holdings, 57forward curve, illustration of, 293fforward guidance, 30–31

Cochrane on, 358–59credibility of, 40defining, 39ECB on, 167inflation targets and, 39–41Reifschneider-Williams rule and, 304

Frankel, Jeff, 300FRB-US model, 221, 254, 255, 256f

forecasts, 278free cash flows, 265–66Friedman, Milton, 14, 21, 56, 81, 94, 99, 199

on Federal Reserve, 28–29on inflation, 2on interest rate rules, 220on interest rates, 28–29on liquidity, 214on monetary policy, 2n3on unemployment, 2

Friedman rule, 166, 169Fuhrer, J., 40future free cash flows, 264futures

Federal Reserve on, 10interest rates, 9, 11

Galí, Jordi, 108.GCF. See general collateralized finance rateGDP. See gross domestic productgeneral collateralized finance rate (GCF), 186

targeting, 215Germany, 52Gertler, M., 108, 175Gesselian stamp tax, 54Giannoni, Marc, 108–9, 338

Gini coefficientscalculation of, 317–18financial wealth, 318labor income mass and, 317in United States, 318f

globalization, 360Gnocchi, Stefano, 328Goldman Sachs, 307Goodfriend, Marvin, 54, 91, 180government debt, maturity structure of,

33–34government liabilities, QE and, 33government-sponsored enterprises (GSEs),

212–13Great Depression, 100, 161Great Inflation, 256Great Moderation, 256

Federal Reserve during, 270Great Recession, 70, 199n3

labor force participation and, 72–73monetary policy and, 349performance during, 227

Greenlaw, D., 176Greenspan, Alan, 3, 270

on yield curve, 301Greenwood, R., 33, 175gross domestic product (GDP)

deflator, 231f, 232growth, FOMC and, 278See also nominal GDP targeting

growthaggregate, 315aggregate technology, 320consumption, 315in economic output, 162GDP, 278nominal, 296output, 315in take-home pay, 162in US, 57–58

GSEs. See government-sponsored enterprisesGuha, Krishna, 22, 164–65Gürkaynak, R. S., 46

Hamilton, James, 175, 177, 194, 200, 203–4, 210–12, 214

Handbook of the Equity Risk Premium (Cochrane), 267

Harlow, Bruce, 261Harrison, R., 109Heider, F., 157, 158helicopter money, 36–39Hetzel, Robert, 350Hodrick, Laurie, 306

Index 385

Hoover Institution, xiv, 71, 99households

consumption growth of, 315credit market, 314debt, 314log-log-preferences of, 312

human capital, 360–61hyperactive fiscal policy, 36–39

Iacoviello, M., 241Ihrig, Jane, 215IMF. See International Monetary Fundimpulse response functions, 133f, 134f

demand shocks and, 137fsupply shocks and, 130f, 135f

impulse responses, productivity shocks and, 319f

IN10 model, 241incentives, Federal Reserve and, 25indebtedness, 317–18inequality, 341inflation, xvi, 20, 24, 104, 113

breakeven, 12central banks and, 40, 329falling, 324–25FD rule and, 242Federal Reserve on, 100FOMC on, 8fFriedman on, 2gap, 252goals, in United States, 345lagged, 326flonger-run expectations of, 13long-term interest rates and, 291fmacroeconomic models of, 9market-based inference of, 13model-based inference of, 13nominal GDP and, 320outcomes, FOMC and, 279output gap and, 152–54, 245fpatterns, 327fPCE, 280, 281Phillips curve and, 110quality-adjusted, 280, 300reduction of, 294, 323–24regime change, 171relative standard deviations of, 242shocks, negative, 168standard deviation of, 239steady-state standard deviation of, 240fsurvey data on, 12–13sustained high, 44–48T93 rule and, 243ftrue, 170

uncertainty and, 9n11unconditional distribution of, 152–54unemployment and, 2in United States, 170variability trade-offs, 245fvolatility, 166, 219

inflation expectations, 8, 41anchoring of, 294approximations of, 150breakeven and, 46–48coefficient on, 326fconvergence of, 293Dallas Fed on, 339–40Federal Reserve and, 274, 339–40implications, 298–99interest rate rule and, 156long-term, 42–44, 290–91, 293market-derived, 43tmeasurement of, 44–48in price-level targeting rule, 149real world, 294–96relevance of, 325–26SAIT and, 145fshort-term, 291–93stable, 294fsurvey data and, 48tterm structure and, 293in United States, 48n12upper bounds and, 117–18, 132f, 144fwell-anchored, 299Williams on, 325yield curve and, 291f

inflation rate, 110, 115–16price-level targeting rule and, 134under Reifschneider-Williams rule,

122–23, 135, 137inflation targeting

baseline, 329central banks and, 31, 289consequences of, 292–94by Federal Reserve, 342FOMC on, 346–47, 351forward guidance and, 39–41frameworks, 111–19interest rates under, 292f, 295, 298–99as international standard, 170in Japan, 31monetary policy and, 111–16negative interest rate policy and, 52path amendment of, 40rises in, 30–31yield curve of, 289See also average inflation targeting

inflation-linked bonds, 42n8, 45

386 Index

inflation-tilting rule, 225interest

on reserve accounts, 156, 199on reserve balance, optimality of, 159

interest rate on excess reserves (IOER), 181–84, 187f

federal funds rate and, 183f, 184, 186short-term interest rates and, 302tri-party repo rate and, 185f

interest rate rulesBoard of Governors on, 218with demand shocks, 112n5Federal Reserve on, 222–25, 301–2FOMC on, 218Friedman on, 220inflation expectations and, 156Meltzer on, 220optimality of, 113n6Taylor on, 220temporary price-level targeting rule and, 151

interest rates, xicentral banks and, 104in corridor system, 200cumulative changes in, 177fdistribution of, 157dovish policies on, 118–19of ECB, 157in EU, 28, 157Federal Reserve on, 158, 194in floor system, 200Friedman on, 28–29futures, 9, 11under inflation targeting, 292f, 295,

298–99in Japan, 28, 172liquidity premium and, 295long-term, 290–91, 291flong-term inflation expectations and,

290–91monetary policy and, 155natural, 2New Keynesian model and, 315nominal, 150n12, 156–57price stability and, 2QE and, 273shadow, 226short-term, 178–79, 295, 302short-term nominal, 110–11smoothing, 194, 198–201swaps markets, 9Taylor rule and, 112, 225term structure of, 289–90on Treasury bonds, 176fon Treasury securities, 290–91

in United States, 158, 172volatility of, 292f, 293, 295Wicksellian natural rate of interest, 315zero percent, 166See also effective lower bounds; negative

interest rate policyinterest rates on reserves (IOR), 87International Monetary Fund (IMF), 363international standards, inflation targeting

as, 170investment/savings (IS), 104IOER. See interest rate on excess reservesIOR. See interest rates on reservesIreland, Peter, 196n2, 204, 208, 210, 215IS. See investment/savings

Jackson Hole conference, 74Japan

financial crisis in, 28inflation targets in, 31interest rates in, 28, 172negative interest rate policy in, 49–50, 57QE in, 79–80

JEC. See Joint Economic Committeejob creation, monetary policy and, 162–63Joint Economic Committee (JEC), 76JPMorgan Chase, 185junk debt, 35–36

Kaplan, Robert, 324, 360Karadi, P., 175Kennedy administration, 260Kiley, M. T., 58, 109, 170Kim, Don H., 76Kimball, Miles, 54Klee, E., 183Koby, Y., 49Koenig, E., 109, 314k-percent policy rule, 14, 22Krishnamurthy, A., 76Kydland-Prescott economy, 315

labor force participation, 26by age, 72fby cohort, 316fGreat Recession and, 72–73prime-age, 337, 338funemployment rate and, 72f

labor income massby cohort, 317fGini coefficients of, 317

labor marketeducation and, 337unemployment rate and, 71–72

Index 387

labor slack, 337–39Lacker, Jeff, 205lagged inflation, coefficients on, 326flarge-scale asset purchases

effects of, 174–78QE and, 174

law of one price, 201LCR. See liquidity coverage ratioLeduc, Sylvain, 328leisure decisions, by cohort, 316fLester, Benjamin, 182Levin, Andrew, 29, 70–71, 92–96, 177, 238,

244on credibility, 357on repo rate, 210on stress tests, 286

Levy, Mickey, 95, 300LIBOR, 59flife cycle consumption, 320Lilley, Andrew, 70, 171liquidity, 12

Friedman on, 214trap, 105n3, 115

liquidity coverage ratio (LCR), 213liquidity preference hypothesis, 289–90liquidity premium, interest rates and, 295log-log-preferences, of households, 312log-normal distribution, 313longer-run expectations, of inflation, 13Longer-Run Strategy Statement, 275longer-term equilibrium, 346long-term inflation expectations

interest rates and, 290–91short-term inflation expectations and, 293

long-term interest ratesdetermination of, 290–91inflation and, 291f

loss ratio, 220Loungani, Prakash, 70–71, 177lower bounds

binding, 169central banks and, 105equilibrium in, 105n3of nominal interest rate, 156–57supply shocks and, 169zero, 157–58, 323, 331See also effective lower bounds

Macaulay duration, 69Macro Model Data Base, xiv, 218, 221, 248macroeconomic models, 109–11

dynamic stochastic general equilibrium in, 208

Federal Reserve and, 235–47

of inflation, 9of monetary policy, 14–16nominal interest rates and, 174–75optimal rules in, 244–47

macroeconomic policy, 3macroeconomic shocks, 346macroprudential efforts, 305Madigan, B., 40makeup strategies, 327–28market expectations, 271market feedback

monetary aggregates and, 296monetary policy and, 296–98

market perceptions, of Federal Reserve, 296, 302–3

market pricing, 47–48of options, 67–71

market quotes, federal funds rate and, 10fmarket signals, 211–12Martin, Bill, 259maturities, discount rate and, 265n1maturity structure, of government debt,

33–34maximum employment, 73McCallum, B., 220medium-scale policy model, 237–38

output gap in, 236trade-off curve in, 246

Meltzer, A., 220Mendes, R., 108, 114Merrill Lynch Option Volatility Estimate

(MOVE), 292fMertens, Thomas, 105, 108–9, 114, 158, 170,

325Mester, Loretta, 278, 364Miller, Bill, 259Minerd, Scott, 302Miranda-Agrippino, S., 177Mishkin, Rick, 20, 108–9modern monetary theory (MMT), 163–64,

209Moench, E., 76monetary aggregates, market feedback and,

296monetary paralysis, 31monetary policy

benchmark, 139calibration, 153t, 154tclarification of, 351–54consumption and, 95–96data dependence and, 6–7defining, 195–98demand shocks and, 154tdesign, 61–62

388 Index

monetary policy (continued)dynamic, 132–38expectations of, 348–49explanation of, 348–49of Federal Reserve, 161, 177–78, 195financial crisis of 2007–2009 and, 363financial markets and, 8–13fiscal policy and, 162, 163–64FOMC on, 278, 284f, 345–46framework comparison, 127–32, 330fFriedman on, 2n3Great Recession and, 349inflation targeting and, 111–16interest rates and, 155job creation and, 162–63macroeconomic models of, 14–16market feedback and, 296–98New Keynesian model and, 155nominal GDP and, 314optimal, under discretion, 111–16outcomes under, 138–40parameterization of, 127–28risk-free rate and, 266role of, 1–5shocks, 238simulated effects of, 330fsocial losses and, 138f, 140fstatic frameworks, 128–32stress tests, 286supply shocks and, 125, 135, 153tsystematic approach to, 351–54uncertainty in, 349–51Williams on, 158, 286

Monetary Policy Report, 6, 217, 221, 353analysis of rules in, 252–53deviations from rules of, 227–35efficacy of, 248rules in, 222–25T93adj rule and, 232

monetary policy rules, xii–xiiimoney

functions of, 81markets, 211private forms of, 81See also currency

money supplyslowdown in, 297ftrue, 296

mortgages, securitized, 307, 314Motto, R., 241MOVE. See Merrill Lynch Option Volatility

EstimateMoynihan, Pat, 260Musk, Elon, 313

Nakamura, E., 177Nakata, T., 108, 114National Bureau of Economic Research

(NBER), 70, 72fnatural real interest rate, 236NBER. See National Bureau of Economic

Researchnegative feedback loops, FOMC and, 273negative interest rate policy

alternatives to, 32in cashless limit, 50–53customers and, 157–58drawbacks, 62in EU, 49–50, 57–58, 157–58, 167fairness of, 57financial stability and, 58–59implementation of, 28–29, 50–53, 59–60inflation targeting and, 52in Japan, 49–50, 57mildly negative, 49–50nominal, 52probability of, 68–69QE compared with, 32–35real assets and, 52on reserve accounts, 159–60risks of, 52–53unconstrained, 27, 48–49in United States, 28, 57

Nelson, Bill, 361Neri, S., 241net asset-holding mass, by cohort, 318fnet investment, 265New Keynesian model, xiv, 104, 109, 218

equations in, 155Euler equation in, 155interest rates and, 315monetary policy and, 155nominal GDP and, 311–12nominal short rate in, 156output volatility in, 219Philips curve in, 155small, 236variables in, 110

Nikolsko-Rhevskyy, A., 220, 221, 225, 226, 254Nixon, Richard, 260NK. See small New Keynesian modelnominal bonds, 45nominal GDP targeting, xv–xvi, 169, 358

credit market and, 312Federal Reserve and, 198growth, 297finflation and, 320monetary policy and, 314New Keynesian model and, 311–12

Index 389

output gap in, 171QE and, 306quality-adjusted inflation and, 300in recessions, 319SEP on, 280, 300targets, 300, 311, 320Woodford on, 311

nominal growth, Federal Reserve and, 296nominal income targeting, evaluation of,

327–28nominal interest rate

equations for, 150n12lower bounds of, 156–57

nominal interest rates, macroeconomic mod-els and, 174–75

nominal risk-free rates, 264nominal short rate, in New Keynesian model,

156nonpecuniary costs, 180non-state-contingent nominal contracting,

314NPP rule, 225, 229, 254–55, 257

federal funds rate and, 228fmeasure of, 230fperformance of, 239–41

Office of Management (OMB), 260OK. See small Old Keynesian modelOkun’s law, 4, 223, 270–71Old Keynesian model, xiv, 218

output volatility in, 219small, 237

OLG. See overlapping generations structureOMB. See Office of Managementopen-market operations, 210operating procedure, 214Operation Twist, 301optimal interest rate rule, 120–21“Optimal Monetary Policy in Closed Versus

Open Economies” (Taylor), 23options, 10

call, 67market pricing of, 67–71synthetic, 67

Orphanides, A., 167, 237output gap, 104, 110

CBO, 232central bank and, 329demand shocks and, 136–37equations for, 150n12Euler equations for, 110inflation and, 152–54, 245fin medium-scale policy model, 236in nominal GDP targeting, 171

relative standard deviations of, 242in small New Keynesian model, 236in small Old Keynesian model, 236standard deviation of, 239steady-state standard deviation of, 240fT93 rule and, 243funconditional distribution of, 152–54variability trade-offs, 245f

output gap-tilting rule, 223, 253–54output growth, business cycle theory and, 315output volatility, 219overlapping generations (OLG) structure, 312overnight debt, 93overnight loans, of Federal Reserve, 173

Papell, David, 220, 221, 223, 225, 252, 254paper currency, 53–58, 61–62

abolition of, 84Pastor, L., 267Paulson, Hank, 60–61payment systems, 55–56PC index, 25PCE. See personal consumption expendituresPCE deflator, 223, 233fPenn Central, 260pension funds, 61personal consumption expenditures (PCE),

80, 232f, 351core inflation, 325fheadline inflation, 325finflation, 280, 281measurement of, 335–36

Phillips curve, 104, 127–28, 128n11, 270–71, 339, 361–62

inflation and, 110in New Keynesian model, 155

Piazzesi, Monika, 155–60, 167–68PL rule

federal funds rate and, 231fPCE deflator and, 233fprice-level targets in, 229

Plosser, Charlie, 22, 199n3, 365on balance sheet, 273

PLT. See price-level targetingpolarization, 161–62policy rate path, 10Poole, W., 179, 199Powell, J. H., 272, 284, 286, 300preferred habitat theory, 290Prescott, Ed, 25, 94price stability, 207–8, 336

central banks and, 100interest rates and, 2Taylor-type rules and, 4–5

390 Index

price-level targeting (PLT), xiii, 107, 224–25, 326–27

AIT and, 331algorithm for, 148–50Bernanke on, 346–47dynamic, 123–25evaluation of, 327–28Federal Reserve on, 229with full makeup strategy, 331inflation expectations in, 149inflation rate and, 134mechanisms of, 168parameterized, 139PL rule and, 229state-level, 125supply shocks and, 125temporary, 125–27, 134, 151–52, 346–47

prime-age labor force participation, 337, 338fprivate banks, 178–79Prodan, R., 220, 221, 225, 254productivity, 26

Dallas Fed on, 360–61impulse responses and, 319fprofile, 312–13shocks, 319funits, 313

Proulx, K., 175public comments, FOMC, 276public debt, 211public-private partnerships, 97pure expectations theory, 290

QE. See quantitative easingquadratic loss ratios, 257fquality-adjusted inflation, 280

nominal GDP and, 300quantitative easing (QE), xi–xii, 31, 83

Bernanke on, 272defining, 174by ECB, 35economic recovery and, 80fefficacy of, 74, 78temergency, 35–36Federal Reserve and, 33–34, 211, 271–72fiscal, 35–36fixing, 167FOMC on, 74–75government liabilities and, 33interest rates and, 273in Japan, 79–80large-scale asset purchases and, 174limitations of, 70–71negative interest rate policy compared

with, 32–35

nominal GDP and, 306pure, 32–35in US, 34–35

quarterly model, 312quasi-fiscal policies, 30–31, 60

Reagan, Ronald, 261–62real assets, negative interest rate policy and, 52real bonds, 45real-time measures of discretion, 225–27recessions, 94–95, 272

nominal GDP in, 319reference rate, 121regime change, 171Reifschneider, David, 107, 119

on forecasting, 278–79Reifschneider-Williams rule, xiii, 107,

121–23, 128, 141advantages of, 168AIT and, 134, 165–66algorithm for, 146–48forward guidance and, 304inflation rate under, 122–23, 135, 137lemma 2, 146

relative standard deviationsof inflation, 242of output gap, 242

repo rateLevin on, 210private, 190reverse, 184–85tri-party, 185f, 187f, 190

Republicans, fiscal policy of, 39reserve accounts

at central bank, 156interest on, 156, 199negative interest rate policy on, 159–60

reserve balancesFederal Reserve and, 159foptimality of interest on, 159

residuals, 249reverse repo rate, 184–85, 187fRicco, G., 177risk assessment, of Federal Reserve, 280risk premia, 10

Federal Reserve and, 267filtering for, 12, 22uncertainty and, 290

risk-free ratesmonetary policy and, 266nominal, 264

risk-neutral pricing, 23, 67–71RMSEs. See root mean squared errorsRoberts, J., 58, 109, 170

Index 391

Rogoff, Ken, 54, 70, 83, 91–102, 171root mean squared errors (RMSEs), 279

twenty-year average of, 284fRostagno, M., 241Rotemberg, J., 218R-star estimates, 325fRubin, Bob, 24–25Rudebusch, G., 219, 237rule-based international monetary system, 60rules-based frameworks, data dependence

in, xi

Sack, Brian, 364Şahin, Ayşegül, 338Saidi, F., 157SAIT. See static average-inflation targetingSan Francisco Fed, 325–26Schepens, G., 157Schmidt, Helmut, 260Schmidt, S., 108, 114Schmitt-Grohé, S., 108, 114securities, Federal Reserve holdings, 175fsecuritized mortgages, 307, 314Selgin, George, 97, 169Seneca, M., 109Senyuz, Z., 183SEP. See Summary of Economic Projectionsshadow interest rates, 226Sheedy, Kevin, 314shock absorbers, 301

AIT as, 329shocks

aggregate, 313aggregate demand, 327cost-push, 236demand, 104, 112n5, 115–16, 136–37,

137f, 154tfiscal, 43–44inflation, 168macroeconomic, 346monetary policy, 238productivity, 319fsupply, 125, 130–31, 130f, 134, 135, 135f,

141, 151, 153t, 169short-term inflation expectations, 291–92

long-term inflation expectations and, 293short-term interest rates

corridor system for, 178–79IOER and, 302term structure and, 295f

short-term nominal interest rate, central bank and, 110–11

Shultz, George P., 259–62on Federal Reserve, 307

small New Keynesian model (NK), 236small Old Keynesian model (OK), 237

output gap in, 236trade-off curves in, 246

Smets, F., 237, 254, 255fSmets-Wouters model, 219, 221social losses

monetary policy and, 138f, 140fupper bounds and, 132f

Solow, Bob, 260SOMA. See System Open Market Accountspot curve, illustration of, 293fstatic average-inflation targeting (SAIT),

119–23, 129, 145inflation expectations and, 145f

“Steady as You Go” (Shultz), 261steady-state distribution, 238steady-state standard deviation

of inflation, 240fof output gap, 240f

Steinsson, J., 177stimulus, 70–71, 94stock market, 274

Federal Reserve and, 271stress tests, monetary policy, 286structural forces, Dallas Fed on, 340–41subsidies, in United States, 158Summary of Economic Projections (SEP), 7,

7f, 324addendums in, 281–82FOMC and, 277–78, 281forecasts in, 277, 280median of, 325fon nominal GDP, 280, 300publication of, 281revamping, 279

Summers, Larry, 24–25supply curve, 186supply shocks, 141

cutoff, 151impulse response functions and, 130f, 135flower bounds and, 169monetary policy and, 125, 135, 153tnegative, 130–31positive, 134price-level targeting rule and, 125responses to, 131temporary price-level targeting rule and,

151survey data

Federal Reserve, 9n12on inflation, 12–13inflation expectations and, 48t

Svensson, Lars, 108, 167, 219, 237

392 Index

Swanson, E., 175swaps markets, interest rates, 9Sweden, 38–39synthetic breakeven, 45–46

cap, 46fsynthetic breakevens, CPI and, 69synthetic options, 67System Open Market Account (SOMA), 75–76

T93 rule, 229, 252–53, 255–56federal funds rate and, 228f, 231f, 233finflation and, 243fmeasure of, 230foutput gap and, 243fPCE deflator and, 233fperformance of, 239–41

T93adj rule, 229federal funds rate and, 231f, 233fMonetary Policy Report and, 232PCE deflator and, 233f

take-home pay, growth in, 162taper tantrum, 76–77

Federal Reserve in, 272targeted inflation patterns, shocks and, 327fTase, M., 183Taylor, John, 4, 20–23, 109, 203–6, 238, 241,

243on central banks, 304–5on interest rate rules, 220on policy rules, 252

Taylor rule, 4–5, 14–15, 52, 231adjusted, 224–25, 236defining, 218, 222–23deviation, 148expression of, 222–23federal funds rate and, 226finterest rates and, 112, 225properties of, 4n5

Taylor-type rulesinstrument-rule specification and, 5price stability and, 4–5Woodford on, 4–5

temporary price-level targeting, 125–27, 134Bernanke on, 346–47interest rate rule and, 151supply shocks and, 151

term premia, 22on Treasury, 12

term structureinflation expectations and, 293of interest rates, 289–90short-term interest rates and, 295f

Teryoshin, Y., 221Tetlow, R., 221

Thornton, D., 177time-series models, evolution of, 15fTIPS. See Treasury Inflation-Protected

SecuritiesTolley, G., 199transparency, 284Treasury (US)

bonds, 45debt issuing by, 93term premiums on, 12yield curve, 11

Treasury and Tax Loan Program (TT&L), 210Treasury bills, 296Treasury bonds, interest rates on, 176fTreasury Indexed Bonds, 45n11Treasury Inflation-Protected Securities

(TIPS), 21, 24–25, 42, 85n31daily trading volumes on, 47launch of, 12n13market data, 12spot rates, 12

Treasury securities, 47, 173interest rates on, 290–91

TreasuryDirect, 95Treasury-Fed Accord of 1951, 162tri-party repo rate, 187f

federal funds rate and, 190IOER and, 185f

true money supply, 296TT&L. See Treasury and Tax Loan ProgramTulip, Peter, on forecasting, 278Turner, A., 36

uncertainty, 214balance sheet and, 272–73Federal Reserve and, 267–68FOMC on, 350in monetary policy, 349–51point estimates and, 16frisk premia and, 290yield curve and, 295

unemployment, 94Friedman on, 2gap, 234inflation and, 2

unemployment rate, 5FOMC on, 72flabor force participation and, 72flabor market and, 71–72longer-run, 7fmeasurement of, 336natural, 338–39recession and, 21in United States, 14–15, 71–72

Index 393

unicornsdefining, 266n2valuation of, 266

United Kingdom, 38–39United States (US)

central banks in, 169–70CPI in, 47–48data dependence in, 7economic recovery in, 72ffiscal policy in, 39fiscal shocks in, 43–44Gini coefficients in, 318fgrowth in, 57–58inflation expectations in, 48n12inflation goals in, 345inflation in, 170interest rates in, 158, 172negative interest rate policy in, 28, 57QE in, 34–35subsidies in, 158unemployment rate in, 14–15, 71–72yield curve in, 24

upper bound, 116–19, 143–45binding, 116inflation expectations and, 132f, 144finflation expectations with, 117–18social losses and, 132f

Uribe, M., 108, 114US. See United States

valuation, 271Federal Reserve and, 267–68of unicorns, 266

vanilla breakeven, 46fVayanos, D., 175vector autoregressions, 266Veronesi, P., 267Vissing-Jorgensen, A., 76, 268Volcker, Paul, 3, 168–69, 262Volcker disinflation, 256, 331–32, 357Vuolteenaho, T., 266

WACC. See weighted average cost of capitalWaldron, M., 109Warsh, Kevin, 161–65weighted average cost of capital (WACC), 264welfare gains, 120–21well-anchored inflation expectations, 299Wenzel, Robert, 168–69Whelpley, W., 180Wicksellian natural rate of interest, 315Wieland, Volker, 166–67, 170, 237, 241, 244,

252Williams, John, 105–9, 114, 119, 155, 158, 244

on AIT, 165–66on data dependence, 274on inflation expectations, 325on monetary policy, 158, 286

Woodford, Mike, 4–5, 39, 108, 109, 175, 218on nominal GDP, 311

World Bank, 97Wouters, R., 237, 254, 255fWright, I., 76Wu, J. C., 175

Yellen, Janet, 52, 253–54, 348Yellen rule, 257yield curve, 46–47

factors influencing, 292Greenspan on, 301inflation expectations and, 291fof inflation targeting, 289shape of, 291–92slope of, 295Treasury, 11uncertainty and, 295in United States, 24volatility, 299

Yoldas, E., 183

Zabai, A., 175zero lower bound (ZLB), 157–58, 323

time at, 331