Policy rules that are consistent with ination targeting are examined in a small macroeconometric model of the US economy. We compare the properties and outcomes of explicit instrument rules as well as targeting rules. The latter, which imply implicit instrument rules, may be closer to actual operating procedures of inflation-targeting central banks. We find that ination forecasts are central for good policy rules under inflation targeting. Some simple instrument and targeting rules do remarkably well relative to the optimal rule; others, including some that are often used as representing inflation targeting, do less well.

We hope to be able to provide answers to the following questions: 1) Has there been a structural break in postwar U.S. real GDP growth toward more stabilization? 2) If so, when would it have been? 3) What's the nature of the structural break? For this purpose, we employ a Bayesian approach to dealing with structural break at an unknown changepoint in a Markov-switching model of business cycle. Empirical results suggest that there has been a structural break in U.S. real GDP growth toward more stabilization, with the posterior mode of the break date around 1984:1. Furthermore, we #nd a narrowing gap between growth rates during recessions and booms is at least as important as a decline in the volatility of shocks. Key Words: Bayes Factor, Gibbs sampling, Marginal Likelihood, Markov-Switching, Stabilization, Structural Break. JEL Classi#cations: C11, C12, C22, E32. 1. Introduction In the literature, the issue of postwar stabilization of the U.S. economy relative to the prewar period has...

This paper examines the link between information technology (IT) and the post-1995 U.S. productivity revival. Industry-level data show a broad productivity growth resurgence that reflects both the production and the use of IT. The most IT-intensive industries experienced significantly larger productivity gains than other industries and there is a strong link between IT capital shares and the relative acceleration of labor productivity. A novel decomposition shows that all of the direct contribution to the post-1995 productivity acceleration can be traced to the industries that either produce IT or use IT most intensively, with no net contribution from other industries that are relatively isolated from the IT revolution.

Because asset prices are forward-looking, they constitute a class of potentially useful predictors of inflation and output growth. The premise that interest rates and asset

Abstract: In the first half of this century, special attention was given to two features of the business cycle: the comovement of many individual economic series and the different behavior of the economy during expansions and contractions. Recent theoretical and empirical research has revived interest in each attribute separately, and we survey this work. Notable empirical contributions are dynamic factor models that have a single common macroeconomic factor and nonlinear regime-switching models of a macroeconomic aggregate. We conduct an empirical synthesis that incorporates both of these features. It is desirable to know the facts before attempting to explain them; hence, the attractiveness of organizing business-cycle regularities within a model-free framework. During the first half of this century, much research was devoted to obtaining just such an empirical characterization of the business cycle. The most prominent example of this work

this paper are covered by U.S. Patent 5,893,069

: This paper links the term structure to perceptions of monetary policy. Long-horizon forecasts of short rates required by no-arbitrage term structure models are heavily influenced by the endpoints, or limiting conditional forecasts, of the short rate process. Common assumptions that the short rate is mean-reverting or contains a unit root are shown to generate unrealistic yield predictions. Failures occur because these assumptions inadequately account for historical shifts in market perceptions of the policy target for inflation. This paper links endpoint shifts to agent learning about shifts in long-term policy goals. Shifting endpoints in short rate processes significantly improve yield predictions. Keywords: Expectations Hypothesis, changepoints, breakpoints, learning JEL classification: E43 a Federal Reserve Bank of Kansas City, 925 Grand Boulevard, Kansas City MO 64198, USA. b Faculty of Economics and Politics, University of Cambridge, Cambridge CB3 9DD, UK. We are grateful ...

From 1960-1983, the standard deviation of annual growth rates in real GDP in the United States was 2.7%. From 1984-2001, the corresponding standard deviation was 1.6%. This paper investigates this large drop in the cyclical volatility OF real economic.activity. The paper has two objectives. The first is to provide a comprehensive characterization of the decline in volatility using a large number of U.S. economic time series and a variety of methods designed to describe time-varying time series processes. In so doing, the paper reviews the literature on the moderation and attempts to resolve some of its disagreements and discrepancies. The second objective is to provide new evidence on the quantitative importance of various explanations for this "great moderation". Taken together, we estimate that the moderation in volatility is attributable to a combination of improved policy (20-30%), identifiable good luck in the form of productivity and commodity price shocks (20-30%), and other unknown forms of good luck that manifest themselves as smaller reduced-form forecast errors (40-60%).

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We examine whether the U.S. rate of price inflation has become harder to forecast and, to the extent that it has, what changes in the inflation process have made it so. The main finding is that the univariate inflation process is well described by an unobserved component trend-cycle model with stochastic volatility or, equivalently, an integrated moving average process with time-varying parameters. This model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well. Key words: Phillips curve, trend-cycle model, moving average, great moderation JEL codes: C53, E37 *We thank Jonas Fisher for bringing several of the issues discussed in this paper to our attention in a 1999 conversation, Luca Benati for (more recent) helpful suggestions, and Matthew Shapiro, Robert Gordon, and two anonymous referees for helpful comments on an earlier draft. Replications files for the results in this paper can be downloaded from