Frederic S. Mishkin

Abstract: List of FiguresPrefacePt. 1Inflation Targeting: The Issues11Introduction32The Rationale for Inflation Targeting103Issues of Design and Implementation26Pt. 2Case Studies and Empirical Evidence394German and Swiss Monetary Targeting: Precursors to Inflation Targeting415New Zealand: Inflation-Targeting Pioneer866Canada: Inflation Targets as Tools of Communication1157United Kingdom: The Central Bank as Counterinflationary Conscience1458Sweden: Searching for a Nominal Anchor1729Three Small Open Economies: Israel, Australia, and Spain20310Inflation Targeting: How Successful Has It Been?252Pt. 3Conclusions28511What Have We Learned?28712Inflation Targeting for the United States and the European Monetary Union309Notes335References355Index367

Abstract: 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

Abstract: Understanding of monetary transmission mechanisms is crucial to answering a broad range of questions. These transmission mechanisms include interest-rate effects, exchange-rate effects, other asset price effects, and the so-called credit channel. This introduction to the symposium provides an overview of the main types of monetary transmission mechanisms found in the literature and a perspective on how the papers in the symposium relate to the overall literature and to each other.

Abstract: We investigate the stochastic relation between income and consumption (specifically, consumption of food) within a panel of about 2,000 households. Our major findings are: 1. Consumption responds much more strongly to permanent than to transitory movements of income. 2. The response to transitory income is nonetheless clearly positive. 3. A simple test, independent of our model of consumption, rejects a central implication of the pure life cycle-permanent income hypothesis. The observed covariation of income and consumption is compatible with pure life cycle-permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent. As a general matter, our findings support the view that families respond differently to different sources of income variations. In particular, temporary income tax policies have smaller effects on consumption than do other, more permanent changes in income of the same magnitude.

Abstract: This paper examines the out-of-sample performance of various financial variables as predictors of U.S. recessions. Series such as interest rates and spreads, stock prices, and monetary aggregates are evaluated individually and in comparison with other financial and nonfinancial indicators. The analysis focuses on out-of-sample performance from one to eight quarters ahead. Results show that stock prices are useful with one- to three-quarter horizons, as are some well-known macroeconomic indicators. Beyond one quarter, however, the slope of the yield curve emerges as the clear individual choice and typically performs better by itself out of sample than in conjunction with other variables.

Abstract: Hyperbolic discount functions induce dynamically inconsistent preferences, implying a motive for consumers to constrain their own future choices. This paper analyzes the decisions of a hyperbolic consumer who has access to an imperfect commitment technology: an illiquid asset whose sale must be initiated one period before the sale proceeds are received. The model predicts that consumption tracks income, and the model explains why consumers have asset-specific marginal propensities to consume. The model suggests that financial innovation may have caused the ongoing decline in U. S. savings rates, since financial innovation in- creases liquidity, eliminating commitment opportunities. Finally, the model implies that financial market innovation may reduce welfare by providing “too much” liquidity.

Abstract: This paper reviews the recent literature on monetary policy rules. To organize the discussion, we exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real word complications. We concentrate on developing results that are robust across a reasonable variety of competing macroeconomic frameworks. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making credible commitments to fight inflation and consider the implications of frictions such as imperfect information and model uncertainty. Finally, we assess how proposed simple rules, such as the Taylor rule, square with the principles for optimal policy that we describe. We use this same metric to evaluate the recent course of U.S. monetary policy.

Abstract: In the wake of the ERM and Mexican currency crises, the subject of balance-of-payments crises has come to the forefront of academic and policy discussions. This paper focuses on the potential links between banking and balance-of-payments crises. We examine these episodes for a large number of countries and find that knowing that there are banking problems helps in predicting balance-of-payments crises, but the converse is not true; financial liberalization usually predates banking crises, indeed, it helps predict them. Rather than a causal relationship from banking to balance-of-payments crises, the macroeconomic "stylized facts" that characterize these episodes point to common causes.

Abstract: This paper constructs a simple neoclassical model of intrinsic business cycle dynamics in which borrowers' balance sheet positions play an important role. The critical insight is that the agency costs of undertaking physical investments are inversely related to the entrepreneur's/borrower's net worth. As a result, accelerator effects on investment emerge: Strengthened borrower balance sheets resulting from good times expand investment demand, which in turn tends to amplify the upturn; weakened balance sheets in bad times do just the opposite. Further, redistributions or other shocks that affect borrowers' balance sheets (as in a debt-deflation} may have aggregate real effects.

Abstract: In the wake of the Mexican and Asian currency turmoil, the subject of financial crises has come to the forefront of academic and policy discussions. This paper analyzes the links between banking and currency crises. We find that: problems in the banking sector typically precede a currency crisis--the currency crisis deepens the banking crisis, activating a vicious spiral; financial liberalization often precedes banking crises. The anatomy of these episodes suggests that crises occur as the economy enters a recession, following a prolonged boom in economic activity that was fueled by credit, capital inflows and accompanied by an overvalued currency.