interpreting the great moderation changes in the volatility of economic activity at the macro and micro levels most advanced economies have experienced a striking decline in the volatility of aggregate economic activity since the early 1980s volatility reductions are evident for output and employment at the aggregate level and across most industrial sectors and expenditure categories inflation and inflation volatility have also declined dramatically previous studies offer several potential explanations for this great moderation we review evidence on the great moderation in conjunction with evidence about volatility trends at the micro level we combine the two types of evidence to develop a tentative story for important components of the aggregate volatility decline and its consequences the key ingredients are declines in firm level volatility and aggregate volatility most dramatically in the durable goods sector surprisingly this has occurred without a decline in household consumption volatility and individual earnings uncertainty our explanation for the aggregate volatility decline stresses improved supply chain management particularly in the durable goods sector and less important a shift in production and employment from goods to services we provide evidence that better inventory control made a substantial contribution to declines in firm level and aggregate volatility consistent with this view if we look past the turbulent 1970s and early 1980s much of the moderation reflects a decline in high frequency short term fluctuations while these developments represent efficiency gains they do not imply nor is there evidence for a reduction in economic uncertainty faced by individuals and households

the most dangerous idea in federal reserve history monetary policy doesn t matter the hundredth anniversary of the founding of the federal reserve is a natural time to reflect on the record of us monetary policy it is widely agreed that this record is far from perfect and that there have been some major failures of monetary policy over the past century our thesis is that overly pessimistic views about the power of monetary policy have been a critical source of these failures there is little doubt that the opposite problem an overinflated belief in the power of monetary policy has also contributed to important policy errors most famously policymakers in the mid 1960s believed that they faced a longrun inflation unemployment trade off and thus that monetary policy could move the economy to a sustained path of very low unemployment and low inflation this belief led them to pursue highly expansionary policy starting the economy down the road to the inflation of the 1970s for example romer and romer 2002 and primiceri 2006 the record of such errors has led some to argue that perhaps the most impor tant attribute of a successful central banker is humility for example booth 2012 in this paper we present evidence that an unduly pessimistic view of what monetary policy can accomplish has been a more impor tant source of policy errors and poor outcomes over the history of the federal reserve at various times in the 1930s faced with the great depression federal reserve officials believed that the power of monetary policy to combat the downturn or stimulate recovery was minimal in

monetary mystique secrecy and central banking abstract the paper contains a discussion of the role of secrecy in the implementation of monetary policy it documents the federal reserve s defense of secrecy as argued in a recent freedom of information act suit the federal reserve s arguments are evaluated on the basis of economic theory theoretical papers related to the secrecy issue are reviewed the discussion highlights a number of potential benefits and costs of central bank secrecy and identifies some conditions under which secrecy could be socially beneficial

pollution permits and environmental innovation abstract this paper starts with a warning about the negative impact of plain pollution allowance markets on environmental pollution innovation stand alone spot markets enable the government to expropriate an innovation by offering a competing technology pollution permits that puts an arbitrary downward pressure on the licensing price advance allowances reduce expropriation but still create suboptimal incentives for innovation they have the further drawback that permits are inefficiently used when the innovation occurs options to pollute at a given striking price fare better than allowances because they create private incentives to phase out pollution in the case of innovation we characterize the social optimum and show that it can be implemented by issuing options to pollute inter alia finally the paper compares ex ante and ex post government procurement surprisingly ex post licensing by the innovator to the government may yield a higher licensing fee than an ex ante contract

a theory of ambiguity credibility and inflation under discretion and asymmetric information this paper develops a positive theory of credibility ambiguity and inflation under discretion and asymmetric information the monetary policymaker maximizes his own politically motivated objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth the relative importance he assigns to each target shifts stochastically through time his current preference trade off is known to him but not to the public when choosing the state contingent path of money growth for the present and the future the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker s objectives although expectations are rational information is imperfect because monetary control procedures are imprecise as a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors the public becomes aware of changes gradually by observing past monetary growth credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker credibility is lower the noisier monetary control and the more stable the objectives of the policymaker looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth when the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero the reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation he leaves the inevitable negative surprises for periods in which he cares more about inflation prevention this result provides an explanation for the fed s preference for ambiguity recently documented by goodfriend 1986 the policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference the paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation

market structure and inter industry wage differences the case of taiwan abstract this note reports the structure and the determinants of inter industry wage differences in the manufacturing sector of taiwan it was found that market concentrations are significantly correlated with wage differentials from this outcome we tentatively conclude that market structure is an important factor in generating wage income differentials

the quest for prosperity without inflation abstract in recent years activist monetary policy rules responding to inflation and the level of economic activity have been advanced as a means of achieving effective output stabilization without inflation advocates of such policies suggest that their flexibility may yield substantial stabilization benefits while avoiding the excesses of overzealous discretionary fine tuning such as is thought to characterize the experience of the 1960s and 1970s in this study i present evidence suggesting that these conclusions are misguided using an estimated model i show that when informational limitations are properly accounted for activist policies would not have averted the great inflation but instead would have resulted in worse macroeconomic performance than the actual historical experience the problem can be attributed in large part to the counterproductive reliance of these policies on the output gap the analysis suggests that the dismal economic outcomes of the great inflation may have resulted from an unfortunate pursuit of activist policies in the face of bad measurement specifically overoptimistic assessments of the output gap associated with the productivity slowdown of the late 1960s and early 1970s

equilibrium wage dispersion and interindustry wage differentials this paper develops a search theoretic explanation of interindustry wage differentials given coordination problems in the labor market the probability of filling a vacancy is an increasing function of the wage offered in equilibrium firms that find vacancies more costly will offer higher wages the model thus explains the persistence of interindustry wage differentials and their correlation with industry average capital labor ratio and profitability additionally the model predicts that high wage firms will receive more applications per job opening and that wages in the labor market will behave as strategic complements

price level determinacy with an interest rate policy rule and rational expectations abstract this paper reconsiders a result obtained by sargent and wallace namely that price level indeterminacy obtains in their model if the monetary authorities adopt a feedback rule for the interest rate rather than the money stock it is shown that the indeterminacy vanishes if the interest rate rule is chosen so as to have a desired effect on the expected quantity of money demanded this holds even if considerable weight is given in the choice of a rule to the aim of smoothing interest rate fluctuations

a comparative analysis of inter industry wage differentials industrialized versus developing countries this study aims to compare the available evidence on inter industry wage structure for industrialized and developing countries and to find whether the industry wage differentials are consistent and stable independent of time and space moreover it tries to clarify some of the determinants of industry wage differentials international evidence supports the wage differential regularity across countries and the factors underlying inter industry wage differentials are found to be more or less the same for both industrialized and developing countries

industry specific human capital knowledge labour and industry wage structure in taiwan this paper investigates the role of industry specific human capital ishc in determining industry wage structure the model presented in this paper distinguishes between knowledge labour and physical labour knowledge labour is physical labour embodied with ishc it is postulated that more ishc intensive industries such as high tech industries pay higher wages and the wage premiums increase with workers experience the hypothesis is tested using a merged sample of 1997 1999 manpower utilization survey data from a newly industrialized economy taiwan the findings show support for the effect of ishc

golden fetters the gold standard and the great depression barry eichengreen oxford university press new york 1992 pp xix 448 39 95

a rehabilitation of monetary policy in the 1950 s monetary policy in the united states in the 1950s was remarkably modern analysis of federal reserve records shows that policymakers had an overarching aversion to inflation and were willing to accept significant costs to prevent it from rising to even moderate levels this aversion to inflation was the result of policymakers beliefs that higher inflation could not raise output in the long run that the level of output that would trigger increases in inflation was only moderate and that inflation had large real costs in the medium and long runs furthermore both narrative and empirical analysis indicates that policymakers were not wedded to free reserves or other faulty indicators in their implementation of policy empirical estimates of a forward looking taylor rule show that policymakers in the 1950s raised nominal interest rates more than one for one with increases in expected inflation and suggests that monetary policy in the 1950s was more similar to policy in the 1980s and 1990s than to that in the late 1960s and 1970s one implication of these findings is that the inflation of the late 1960s and 1970s must have been the result of a change in the conduct of policy this abstract was borrowed from another version of this item

central bank independence and macroeconomic performance some comparative evidence this note uses information on a sample of sixteen oecd countries to assess the relationship between central bank independence and macroeconomic performance as previous work suggests politically controlled central banks are more likely to pursue policies that lead to high and variable inflation however the authors find little evidence that political control of central bank policy has any impact on measures of the level or variability of growth unemployment or the ex ante real interest rate copyright 1993 by ohio state university press

sectoral shifts and interindustry wage differentials the observed differences in wages across industries may arise from a lack of worker mobility particularly among experienced workers allowing the effects of industry shocks to persist for some time although young workers arbitrage wage shocks they will have little effect on the dispersion of experienced workers wages if young and old workers are poor substitutes in production this explanation is investigated using the five censuses of population between 1940 and 1980 the evidence strongly suggests that differences in pay are not temporary phenomena the data provide some support for the role of human capital and ability

inflation targeting a new framework for monetary policy he world s central bankers and their staffs meet regularly in venues from basle to washington to share ideas and discuss common problems perhaps these frequent meetings help explain why changes in the tactics and strategy of monetary policymaking such as the adoption of money growth targets in the 1970s the intensification of efforts to reduce inflation in the 1980s and the recent push for increased institutional independence for central banks tend to occur in many countries more or less simultaneously whatever their source major changes in the theory and practice of central banking are of great importance for both individual countries and the international economy in this article we discuss a new strategy for monetary policy known as inflation targeting which has sparked much interest and debate among central bankers and monetary economists in recent years this approach is characterized as the name suggests by the announcement of official target ranges for the inflation rate at one or more horizons and by explicit acknowledgment that low and stable inflation is the overriding goal of monetary policy other important features of inflation targeting include increased communication with the public about the plans and objectives of the monetary policymakers and in many cases increased accountability of the central bank

a century of us central banking goals frameworks accountability several key episodes in the 100 year history of the federal reserve have everal key episodes in the 100 year history of the federal reserve have been referred to in various contexts with the adjective great attached to been referred to in various contexts with the adjective great attached to them the great experiment of the federal reserve s founding the great them the great experiment of the federal reserve s founding the great depression the great infl ation and subsequent disinfl ation the great moderation depression the great infl ation and subsequent disinfl ation the great moderation and the recent great recession here i ll use this sequence of great episodes and the recent great recession here i ll use this sequence of great episodes to discuss the evolution over the past 100 years of three key aspects of federal to discuss the evolution over the past 100 years of three key aspects of federal reserve policymaking the goals of policy the policy framework and accountability reserve policymaking the goals of policy the policy framework and accountability and communication the changes over time in these three areas provide a useful and communication the changes over time in these three areas provide a useful perspective i believe on how the role and functioning of the federal reserve have perspective i believe on how the role and functioning of the federal reserve have changed since its founding in 1913 as well as some lessons for the present and for changed since its founding in 1913 as well as some lessons for the present and for the future the future

does unmeasured ability explain inter industry wage differentials this paper provides empirical assessments of the two leading explanations of measured inter industry wage differentials 1 true wage differentials exist across industries and 2 the measured differentials simply reflect unmeasured differences in workers productive abilities first we summarize the existing evidence on the unmeasured ability explanation second we construct a simple model which shows that if matching is important then endogenous job change decisions can create important self selection biases even in first differenced estimates of industry wage differentials third we analyze a sample that approximates the experiment of exogenous job loss we find that i the wage change experienced by a typical industry switcher closely resembles the difference in the relevant industry differentials estimated in a cross section and ii pre displacement industry affiliation plays an important role in post displacement wage determination

inter industry wage premiums and industry specific productivity in taiwan by using taiwan s manpower utilization survey data for the 1978 2000 period different inter industry wage premiums in taiwan are observed and the impact of workers industry specific productivity on the wage explored the empirical results show that industry specific skills result in industry stayers having higher wages than industry switchers through their reservation wages it is also found that the pre displacement industry affiliations that are associated with the post displacement wages are explained by the workers unobserved abilities furthermore by comparing the different residual means between industry switchers and stayers based on each industry s wage equation it is found that the switchers are low wage workers who tend to be located in the high wage industries the high wage industry leavers are also found to have higher post displacement wage residuals than the low wage industry leavers these results suggest that the differences in industry wage premiums may be explained by the industry

the perils of nominal targets a monetary authority can be committed to pursuing an inflation price level or nominal gdp target yet systematically fail to achieve the prescribed goal constrained by the zero lower bound on the policy rate the monetary authority is unable to implement its objectives when private sector expectations stray far enough from the target low inflation expectations become self fulfilling resulting in an additional markov equilibrium in which the monetary authority falls short of the nominal target average output is below its efficient level and the policy rate is typically low introducing a stabilization goal for long term nominal rates can implement a unique markov equilibrium without fully compromising stabilization policy

what is wrong with taylor rules using judgment in monetary policy through targeting rules it is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule e ither ageneral targeting rule explicit objectives for monetary policy or a specific targeting rule a criterion for the forecasts of the target variables to be fulfilled essentially the equality of the marginal rates of transformation and substitution between the target variables targeting rules allow the use of judgment and extramodel information are more robust and easier to verify than optimal instrument rules and they can nevertheless bring the economy close to the socially optimal equilibrium

long term wage fluctuations with industry specific human capital exploiting long term interindustry demand shifts this article provides evidence that 1 industry level wages do not respond to industry demand conditions 2 at the industry level the employment of young workers responds more to demand shifts than does the employment of experienced workers and 3 the postdisplacement wages of displaced workers are strongly affected by demand in their predisplacement industries these findings are consistent with a model in which worker s investments in industry specific skills pose a barrier to interindustry labor mobility and wages do not respond to spot labor market conditions

reinterpreting industry premiums match specific productivity this article builds a simple model of worker sorting and matchspecific productivity to explain interindustry wage differentials high skilled workers sort themselves into the industries offering more jobs that are better matched to them and those industries pay higher wages on average in job transition following an exogenous job separation the likelihood of industry switching is higher among marginal workers low high skilled workers in high low wage industry empirical findings from a sample of exogenous job separations created from the displaced worker surveys are generally consistent with the implications of the model

market integration between developing countries and urban unemployment the perspective of the real minimum wage this article examines the effect of market integration through free trade and factor mobility on the urban unemployment rate of a developing country whose economy is large enough to influence the terms of trade from the perspective of the real minimum wage it is shown that free trade would result in a rise or a decline in the country s urban unemployment rate depending on its trade pattern while the effect of labour mobility on a country s urban unemployment rate is determined by the difference between the ratio of would be farmers to incoming workers and that of farm leavers to outgoing workers the result of capital mobility will depend on a comparison of the initial urban unemployment rates of two countries

open market operations abstract in an open market operation the central bank swaps currency for bonds we show how injecting money in this way is different from transfers the way policy is usually formulated the model captures liquidity explicitly by modeling the roles of assets in frictional exchange under various specifications for market structure and the acceptability or pledgeability of assets we discuss implications for the fisher and quantity equations the possibility of negative nominal yields liquidity traps and market segmentation when liquidity is endogenized using information theory multiple equilibria emerge with different policy predictions interest on reserves and quantitative easing are discussed