see walter bagehot ( [ 1873 ] 1897 ), lombard street : a description of the money market ( new york : charles scribner ’ s sons ). the classic theoretical analysis of “ pure ” banking panics is in douglas w. diamond and philip h. dybvig ( 1983 ), “ bank runs, deposit insurance, and liquidity, ” journal of political economy, vol. 91 ( 3 ), pp. 401 – 19 ). note that the term “ panic ” does not necessarily imply irrational behavior on the part of depositors or investors ; it is perfectly rational to participate in a run if one fears that the bank will be forced to close. however, the collective action of many depositors or investors can lead to outcomes that are undesirable from the point of view of the economy as a whole. for further discussion, see ben s. bernanke ( 2009 ), “ reflections on a year of crisis, ” speech delivered at “ financial stability and macroeconomic policy, ” a symposium sponsored by the federal reserve bank of kansas city, held in jackson hole, wyo., august 20 – 22. bis central bankers ’ speeches unlikely. but this confidence was misplaced. once the crisis began, repo lenders became increasingly concerned about the possibility that they would be forced to receive collateral instead of cash, collateral that would then have to be disposed of in falling and illiquid markets. in some contexts, lenders responded by imposing increasingly higher haircuts, cutting the effective amount of funding available to borrowers. in other contexts, lenders simply pulled away, as in a deposit run ; in these cases, some borrowers lost access to repo entirely, and some securities became unfundable in the repo market. in either case, absent sufficient funding, borrowers were frequently left with no option but to sell assets into illiquid markets. these forced sales drove down asset prices, increased volatility, and weakened the financial positions of all holders of similar assets. volatile asset prices and weaker borrower balance sheets in turn heightened the risks borne by repo lenders, further boosting the incentives to demand higher haircuts or withdraw funding entirely. this unstable dynamic was operating in full force around the time of the near failure of bear stearns in march 2008, and again during the worsening of the crisis in mid - september of that year. 5 classic panic - type phenomena occurred in other contexts as

markets? clear communication of the federal open market committee ’ s ( fomc ’ s ) views on the economic outlook and the likely evolution of policy is essential in managing the market ’ s expectations. the committee has a number of communication outlets, including the policy statement, the chair ’ s news conference, and the summary of economic projections ( sep ). the sep in particular has been useful in providing information on policymakers ’ assessments of the potential growth rate of the economy and r *, the equilibrium real interest rate, both of which help guide the market ’ s expectations of the eventual path of policy. however, avoiding unintended market reactions has not always been easy. the example that immediately comes to mind is the taper tantrum of mid - 2013. to recap, over the course of may and june in 2013, the yield on 10 - year treasury securities increased almost 1 percentage point amid increased market discussion of the eventual tapering of fed asset purchases and some key communications on the topic ( figure 1 ). 4 in particular, the 10 - year yield rose about 10 basis points after then chairman bernanke discussed tapering in public for the first time during the question - and - answer session of his joint economic committee testimony on may 22, commenting that the fomc could historically, there have been times when central banks have preferred to surprise markets - - most notably, when changing the value of exchange rate pegs during the era of fixed exchanges. indicating that a change in the peg was coming would invite an immediate run on the currency, at a significant cost to the central bank ’ s foreign reserves - - even in economies with extensive capital controls. also notably, eurodollar futures rates and ois ( overnight index swap ) forward rates for intermediate horizons rose sharply, likely in part because some investors who were surprised by the tapering news also revised their expectations about the path of the policy rate. - 3reduce the pace of purchases “ in the next few meetings ” if it saw continued improvement in the labor market that it was confident would be sustained. 5 yields rose even more sharply after the june fomc meeting, when, during his postmeeting press conference, chairman bernanke noted that if the economy evolved as expected, the fomc anticipated reducing the pace of purchases in the latter part of 2013 and halting purchases altogether by the middle of 2014. 6 information gathering is an important part of managing market expectations - - for the simple reason that you