. the approach requires the specification of an explicit objective function as well as of the investigator's prior probabilities over the set of plausible models and parameter values. the bayesian approach provides a useful benchmark for policy in an environment of well - defined sources of uncertainty about the structure of the economy, and the resulting policy prescriptions give relatively greater weight to outcomes that have a higher probability of being realized. in contrast, other researchers, such as lars hansen and thomas sargent, have developed robust - control methods – adapted from the engineering literature – that are aimed at minimizing the consequences of worst - case scenarios, including those with only a low probability of being realized ( hansen and sargent, 2007 ). an important practical implication of all this recent literature is that brainard's attenuation principle may not always hold. for example, when the degree of structural inertia in the inflation process is uncertain, the optimal bayesian policy tends to involve a more pronounced response to shocks than would be the case in the absence of uncertainty ( soderstrom, 2002 ). the concern about worst - case scenarios emphasized by the robustcontrol approach may likewise lead to amplification rather than attenuation in the response of the optimal policy to shocks ( giannoni, 2002 ; onatski and stock, 2002 ; and tetlow and von zur muehlen, 2002 ). indeed, intuition suggests that stronger action by the central bank may a recent example is faust and wright ( 2007 ). be warranted to prevent particularly costly outcomes. although bayesian and robust - control methods provide insights into the nature of optimal policy, the corresponding policy recommendations can be complex and sensitive to the set of economic models being considered. a promising alternative approach – reminiscent of the work that bill poole did in the 1960s – focuses on simple policy rules, such as the one proposed by john taylor, and compares the performance of alternative rules across a range of possible models and sets of parameter values ( levin, wieland, and williams, 1999 and 2003 ). that approach is motivated by the notion that the perfect should not be the enemy of the good ; rather than trying to find policies that are optimal in the context of specific models, the central bank may be better served by adopting simple and predictable policies that produce reasonably good results in a variety of circumstances. given the centrality of inflation expectations for the design of monetary policy, a key development over the past decade has been the burgeoning literature on

conditions in key financial markets – specifically, markets for commercial paper, asset - backed securities ( abs ), and commercial mortgage backed securities ( cmbs ). money market mutual funds have significant investments in cp. when lehman brothers failed, it caused at least one money market mutual fund to " break the buck, " leading to a run on money market funds. three facilities – the asset - backed commercial paper money market mutual fund liquidity facility, the commercial paper funding facility and the money market investor funding facility – were created to restore the functioning of cp markets and allow money market mutual funds to manage through the volatility. 5 conditions in the cp market have improved markedly since the introduction of the various federal reserve facilities aimed at fostering market liquidity. cp spreads – shown in the left - hand panel of figure 4 – have declined sharply since these facilities went into effect. as with the bank and primary dealer - oriented facilities, when spreads narrowed, usage subsided, as shown in the right - hand panel. while usage has declined significantly, market participants tell us that the backstop provided by the facilities continues to bolster market confidence. the term auction lending facility ( talf ) was created as a joint endeavor of the federal reserve and treasury to support economic activity by making credit more readily available for consumers and businesses. the facility provides loans with maturities of up to five years the term auction facility provides credit to depository institutions through an auction mechanism, and liquidity swap lines provide u. s. dollar funding indirectly to foreign banks whose liquidity demands ultimately affect u. s. financial markets. both of these initiatives have been expanded several times during the crisis, most notably when market turmoil reached a peak in september last year. the tslf was established in march 2008 as some large investment banks faced increasingly severe liquidity pressures, which began to limit their ability to hold inventories of financial assets and thereby make markets. the tslf allows primary dealers to borrow treasury securities from the federal reserve for one - month terms against less - liquid collateral, which they can then use as collateral to borrow cash from private counterparties. the pdcf was established shortly after as a backstop source of liquidity for primary dealers. the asset - backed commercial paper money market mutual fund liquidity facility finances purchases of high - quality asset - backed commercial paper by u. s. depository institutions and bank holding companies from money market mutual funds, and the money market investor funding facility provides liquidity to u. s. money