The purpose of this paper is to survey and discuss inflation targeting in the context of monetary policy rules, to clarify the essential characteristics of in‡ation targeting, to compare inflation targeting to other monetary policy rules, and to draw some conclusions for the monetary policy of

This paper utilizes a unique data set of credit card accounts to analyze how people respond to credit supply. Increases in credit limits generate an immediate and signi�cant rise in debt, counter to the Permanent-Income Hypothesis. The “MPC out of liquidity ” is largest for people starting near their limit, consistent with binding liquidity constraints. However, the MPC is signi�cant even for people starting well below their limit, consistent with precautionary models. Nonetheless, there are other results that conventional models cannot easily explain, for example, why so many people are borrowing on their credit cards, and simultaneously holding low yielding assets. The long-run elasticity of debt to the interest rate is approximately 21.3, less than half of which represents balanceshifting across cards. I.

This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound on nominal interest rates. We find that if the economy is subject to stochastic shocks similar in magnitude to those experienced in the U.S. over the 1980s and 1990s, the consequences of the zero bound are negligible for target inflation rates as low as 2 percent. However, the effects of the constraint are non-linear with respect to the inflation target and produce a quantitatively significant deterioration of the performance of the economy with targets between 0 and 1 percent. The variability of output increases significantly and that of inflation also rises somewhat. The stationary distribution of output is distorted with recessions becoming somewhat more frequent and longer lasting. Our model also uncovers that the asymmetry of the policy ineffectiveness induced by the zero bound generates a non-vertical long-run Phillips curve. Output falls increasingly short of potential with lower inflation targets. At zero average inflation, the output loss is in the order of 0.1 percentage points. We also investigate the consequences of the constraint on the analysis of optimal policy based on the inflation-output variability frontier. We demonstrate that in the presence of the zero bound, the variability frontier is distorted as the inflation target approaches zero. As a result comparisons of alternative policy rules that ignore the zero bound can be seriously misleading.

We study the design of monetary policy in a low inflation environment taking into account the limitations imposed by the zero bound on nominal interest rates. Using numerical dynamic programming methods, we compute optimal policies in a simple, calibrated openeconomy model and evaluate the e#ect of the liquidity trap generated by the zero bound. We consider the possibility that the quantity of base money may a#ect output and inflation even when the interest rate is constrained at zero and explicitly account for the substantial degree of uncertainty regarding such quantity e#ects. As an example of such a quantity e#ect, we focus on the portfolio balance channel through which changes in relative money supplies influence the exchange rate. We find that the optimal policy near price stability is asymmetric, that is, as inflation declines, policy turns expansionary sooner and more aggressively than would be optimal in the absence of the zero bound. As a consequence, the average level of inf...

This paper makes a case that the global imbalances of the 2000s and the recent global financial crisis are intimately connected. Both have their origins in economic policies followed in a number of countries in the 2000s and in distortions that influenced the transmission of these policies through U.S. and ultimately through global financial markets. In the U.S., the interaction among the Fed’s monetary stance, global real interest rates, credit market distortions, and financial innovation created the toxic mix of conditions making the U.S. the epicenter of the global financial crisis. Outside the U.S., exchange rate and other economic policies followed by emerging markets such as China contributed to the United States ’ ability to borrow cheaply abroad and thereby finance its unsustainable housing bubble. In my view... it is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s. —Ben S. Bernanke (2009) 1.

..................The massive global movements of capital, products, and talent in the modern economy have fundamentally changed the nature of business in the 21st Century. They have also generated confusion among policymakers and the public. Chicago Graduate School of Business (GSB) will continue our role as thought leader on how these markets work, their effects, and the way they interact with policies and institutions. The Initiative on Global Markets will organize our efforts. It will support original research by Chicago GSB faculty, prepare our students to make good decisions in a rapidly changing business environment, and exchange ideas with policymakers and leading international companies about the biggest issues facing the global economy. The Initiative will span three broad areas: ■ International business ■ Financial markets ■ The role of policies and institutions By enhancing the understanding of business and financial market globalization, and by preparing MBA students to thrive in a global environment, the initiative will help improve financial and economic decision-making around the world. The Initiative on Global Markets was launched with a founding grant from the Chicago Mercantile Exchange (CME) Trust and receives ongoing financial support from the CME Trust and our corporate

The paper discusses the choice between ination targeting and monetary targeting as a strategy for the Eurosystem, the actual strategy the Eurosystem announced in the fall of 1998, the framework for policy decisions appropriate for achieving the the goals of the Eurosystem, the role of exchange rate management in the EMU, and the accountability and transparency of the Eurosystem. The choice between inflation targeting and monetary targeting is, in effect, a choice between high and low transparency. Inflation targeting and monetary targeting, in practice, imply similar policy decisions, but monetary targeting implies that policy decisions are explained in terms of money-growth developments that are not essential for policy. The Eurosystem has specified an operational inflation target, although in a somewhat ambigious way. More importantly, its announced monetary strategy is deficient, since it proposes a prominent role for an essentially irrelevant money-growth indicator in analysis and communicatio...

This paper examines what we have learned about monetary policy strategy and considers how we should change our thinking in this regard in the aftermath of the 2007-09 financial crisis. It starts with a discussion of where the science of monetary policy stood before the crisis and how central banks viewed monetary policy strategy. It then examines how the crisis has changed the thinking of both macro/monetary economists and central bankers. Finally, it looks at the extent to which the science of monetary policy needs to be altered and draws implications for monetary policy strategy.

hat are the mechanisms through which Federal Reserve policy affects the economy? And has financial innovation in recent years affected the monetary transmission

This paper surveys the empirical analyses that examine the effects of the Bank of Japan’s (BOJ’s) quantitative easing policy (QEP), which was implemented from March 2001 through March 2006. The survey confirms a clear effect whereby the commitment to maintain the QEP fostered the expectations that the zero interest rate would continue into the future, thereby lowering the yield curve centering on the short- to medium-term range. There were also phases in which an increase in the current account balances held by financial institutions at the BOJ bolstered this expectation. While the results were mixed as to whether expansion of the monetary base and altering the composition of the BOJ’s balance sheet led to portfolio rebalancing, generally this effect, if any, was smaller than that stemming from the commitment. When viewing the QEP’s impact on Japan’s economy through various transmission channels, many of the analyses suggest that the QEP created an accommodative environment in terms of corporate financing. In particular, the QEP contained financial institutions ’ funding costs from the market and staved off financial institutions ’ funding uncertainties. The QEP’s effect on raising aggregate demand and prices was often limited, due largely to the then progressing corporate balance-sheet adjustment, as well as the zero bound constraint on interest rates.