Part 1 Empirical evidence on money and output: introduction some basic correlations estimating the effect of money on output summary. Part 2 Money in a general equilibrium framework: introduction the Tobin effect money in the utility function summary appendix - the MIU approximation problems. Part 3 Money and transactions: introduction shopping-time models cash-in-advance models other approaches summary appendix - the CIA approximation problems. Part 4 Money and public finance: introduction bugdet accounting equilibrium seigniorage optimal taxation and seigniorage Friedman's rule revisited nonindexed tax systems problems. Part 5 Money and output in the short run: introduction flexible prices sticky prices and wages a framework for monetary analysis inflation persistence summary appendix problems. Part 6 Money and the open economy: introduction the Obstfeld-Rogoff two-country model policy coordination the small open economy summary appendix problems. Part 7 The credit channel of monetary policy: introduction imperfect information in credit markets macroeconomic implications does credit matter? summary. Part 8 Discretionary policy and time inconsistency: introduction inflation under discretionary policy solutions to the inflation bias is the inflation bias important? do central banking institutions matter? lessons and conclusions problems. Part 9 Monetary-policy operating procedures: introduction from instruments to goals the instrument-choice problem operating procedures and policy measures problems. Part 10 Interest rates and monetary policy: introduction interest-rate rule and the price level interest rate policies in general equilibrium models the term structure of interest rates a model for policy analysis summary problems.

Monetary Theory and Policy

The crisis of 2008-09 has focused attention on money and credit fluctuations, financial crises, and policy responses. In this paper we study the behavior of money, credit, and macroeconomic indicators over the long run based on a newly constructed historical dataset for 12 developed countries over the years 1870-2008, utilizing the data to study rare events associated with financial crisis episodes. We present new evidence that leverage in the financial sector has increased strongly in the second half of the twentieth century as shown by a decoupling of money and credit aggregates, and we also find a decline in safe assets on banks' balance sheets. We also show for the first time how monetary policy responses to financial crises have been more aggressive post-1945, but how despite these policies the output costs of crises have remained large. Importantly, we can also show that credit growth is a powerful predictor of financial crises, suggesting that such crises are

Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008

Econometric policy evaluation: A critique

This paper argues that financial imbalances can build up in a low inflation environment and that in some circumstances it is appropriate for policy to respond to contain these imbalances. While identifying financial imbalances ex ante can be difficult, this paper presents empirical evidence that it is not impossible. In particular, sustained rapid credit growth combined with large increases in asset prices appears to increase the probability of an episode of financial instability. The paper also argues that while low and stable inflation promotes financial stability, it also increases the likelihood that excess demand pressures show up first in credit aggregates and asset prices, rather than in goods and services prices. Accordingly, in some situations, a monetary response to credit and asset markets may be appropriate to preserve both financial and monetary stability.

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Asset prices, financial and monetary stability: exploring the nexus

This paper reviews, appraises, and critiques theoretical and empirical research on the connections between the operation of the financial system and economic growth. While subject to ample qualifications and countervailing views, the preponderance of evidence suggests that both financial intermediaries and markets matter for growth and that reverse causality alone is not driving this relationship. Furthermore, theory and evidence imply that better developed financial systems ease external financing constraints facing firms, which illuminates one mechanism through which financial development influences economic growth. The paper highlights many areas needing additional research.

Chapter 12 Finance and Growth: Theory and Evidence

In recent decades, developments in the financial sector have played a major role in shaping macroeconomic outcomes in a wide range of countries. Financial developments have reinforced the momentum of underlying economic cycles, and in some cases have led to extreme swings in economic activity and a complete breakdown in the normal linkages between savers and investors. These experiences have led to concerns that the financial system is excessively procyclical, unnecessarily amplifying swings in the real economy. In turn, these concerns have prompted calls for changes in prudential regulation, accounting standards, risk measurement practices and the conduct of monetary policy in an attempt to enhance both financial system and macroeconomic stability.

Procyclicality of the financial system and financial stability: Issues and policy options

This paper examines the degree to which the failure of one bank would cause the subsequent collapse of other banks. Using unique data on interbank payment flows, the magnitude of bilateral federal funds exposures is quanti- fied. These exposures are used to simulate the impact of various failure scenarios, and the risk of contagion is found to be economically small. This paper quantifies contagion risk present in the U.S. banking system. Unlike previous studies that infer contagion indirectly by identifying common characteristics of banks that are affected by some event (e.g., third-world debt crisis, large bank failure), this study estimates contagion directly by examining data containing the complete universe of federal funds transactions across banks. Using such data allows for straightforward simulation exercises that demonstrate the degree of contagion that might arise from these exposures. The cost of this direct approach to measuring contagion is clear. The data analyzed only incorporate federal funds transactions. Because of severe data limitations, other exposures among banks cannot be examined on a bilateral basis. As a result of this, an obvious criticism of the results that follow is that other exposures may actually be much higher or may be distributed in a particularly contagion-enhancing way. While it will be argued that the federal funds exposures used in this paper make up a substantial fraction of unsecured interbank credit exposures, one must realize that the conclusions reached are conditional on the set of exposures being ex- amined. That is, the estimates of contagion reported here are accurate, yet poten- tially conservative. Despite this caveat, the approach employed in this paper to measure contagion has at least three important advantages. First and foremost, the data measure expo- sures bilaterally. That is, each bank's exposure to every other bank is known. This The views expressed are those of the author and do not necessarily reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve system. The author appreciates the helpful comments of Allen Berger (the editor) and two anonymous referees. Craig H. Furfine is an Economic Advisor, Federal Reserve Bank of Chicago. E-mail:

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Interbank Exposures: Quantifying the Risk of Contagion

Procyclicality of the financial system and financial stability: issues and policy options

This paper examines the likelihood that failure of one bank would cause the subsequent collapse of a large number of other banks. Using unique data on interbank payment flows, the magnitude of bilateral federal funds exposures is quantified. These exposures are used to simulate the impact of various failure scenarios, and the risk of contagion is found to be economically small.

This paper studies the influence of the state of the business cycle on credit ratings. In particular, we assess whether rating agencies are excessively procyclical in their assignment of ratings. Our analysis is based on a model of ratings determination that takes into account factors that measure the business and financial risks of firms, in addition to indicators of macroeconomic conditions. Utilizing annual data on all US firms rated by Standard & Poor's, we find little evidence of procyclicality in ratings. By contrast, we find that initial ratings and rating changes exhibit excess sensitivity to the business cycle. The paper offers two explanations of these results.

Craig H. Furfine

Papers

Procyclicality of the financial system and financial stability: Issues and policy options

Interbank Exposures: Quantifying the Risk of Contagion

Procyclicality of the financial system and financial stability: issues and policy options

Interbank Exposures: Quantifying the Risk of Contagion

Are Credit Ratings Procyclical