Federal Reserve System

About: Federal Reserve System is a other organization based out in Washington D.C., District of Columbia, United States. It is known for research contribution in the topics: Monetary policy & Inflation. The organization has 2373 authors who have published 10301 publications receiving 511979 citations.

The Incredible Volcker Disinflation

Abstract: Using a simple modern macroeconomic model, we argue that the real effects of the Volcker disinflation in the early 1980s were mainly due to imperfect credibility, evident in volatility and stubbornness of long-term interest rates Studying recently released transcripts of the Federal Open Market Committee, we find -- to our surprise -- that Volcker and other FOMC members also regarded long-term interest rates as key indicators of inflation expectations and of their disinflationary policy's credibility We also consider the interplay of monetary targets, operating procedures, and credibility during the Volcker disinflation

Liquidity, Monetary Policy, and the Financial Crisis: A New Monetarist Approach †

Abstract: A model of public and private liquidity integrates financial intermediation theory with a New Monetarist monetary framework. Nonpassive fiscal policy and costs of operating a currency system imply that an optimal policy deviates from the Friedman rule. A liquidity trap can exist in equilibrium away from the Friedman rule, and there exists a permanent nonneutrality of money, driven by an illiquidity effect. Financial frictions can produce a financial-crisis phenomenon that can be mitigated by conventional open market operations working in an unconventional manner. Private asset purchases by the central bank are either irrelevant or they reallocate credit and redistribute income. (JEL E13, E44, E52, E62, G01) Liquidity is a class of assets that is useful in exchange. Some of these liquid assets are government liabilities—Federal Reserve notes, Treasury bills, and Treasury notes. Some are private liabilities—the deposit liabilities of banks and some asset-backed securities, for example. Conventional wisdom holds that the main role of a central bank is to manage public liquidity in a manner that controls inflation and enhances the provision of private liquidity and credit. However, the mechanism by which central bank actions work to perform this role still appears to be poorly understood, as has been highlighted by the financial crisis and the ensuing policy responses. The purpose of this paper is to build a model of public and private liquidity that captures the features of modern economies essential to the analysis of monetary policy, and that can be used to shed light on some current monetary policy problems and questions. What is a liquid asset, and what roles do privately provided and publicly provided liquid assets play in exchange? In a model where we capture these roles for liquid assets, what are the implications for monetary policy? Under what circumstances can a liquidity trap occur? How does monetary policy work when there is a positive quantity of excess reserves held by banks? What does a financial crisis do to the supply of private liquidity, and what should monetary policy do in response?

Distracted Directors: Does Board Busyness Hurt Shareholder Value?

Abstract: This paper examines the impact of independent director busyness on firm value in a setting that addresses a key challenge that the board of directors is an endogenously determined institution. We use the deaths of directors and CEOs as a natural experiment to generate exogenous variation in the time and resources available to independent directors at interlocked firms. The sudden loss of such key co-employees is an ‘attention shock’ because it increases the board committee workload for some independent directors at the interlocked firm – the ‘treatment group’, but not others – the ‘control group’. In a hand-collected sample of 2,551 (592) firms that share a non-deceased independent director with 633 (189) firms subject to director (CEO) deaths, difference-in-differences estimates reveal that investors react negatively to these attention shocks. There is a significant negative stock market reaction of -0.79% (-0.95%) for director-interlocked firms in the treatment group, but no reaction for those in the control group. The treatment effect is significantly magnified by interlocking directors’ busyness (e.g., board size and number of outside directorships), the importance of their roles in the firm (e.g., type of committee membership), and their degree of actual independence (e.g., board classification). Overall, these results provide endogeneity-free evidence that independent directors’ busyness is detrimental to board monitoring quality and shareholder value.

Efficient Monetary Policy Design near Price Stability

Abstract: We study the design of monetary policy in a low inflation environment taking into account the limitations imposed by the zero bound on nominal interest rates. Using numerical dynamic programming methods, we compute optimal policies in a simple, calibrated openeconomy model and evaluate the eect of the liquidity trap generated by the zero bound. We consider the possibility that the quantity of base money may aect output and inflation even when the interest rate is constrained at zero and explicitly account for the substantial degree of uncertainty regarding such quantity eects. As an example of such a quantity eect, we focus on the portfolio balance channel through which changes in relative money supplies influence the exchange rate. We nd that the optimal policy near price stability is asymmetric, that is, as inflation declines, policy turns expansionary sooner and more aggressively than would be optimal in the absence of the zero bound. As a consequence, the average level of inflation is biased upwards. These results indicate that policymakers are faced with a tradeo between the level of inflation and economic stabilization performance when the economy is operating near the zero bound. Finally, we discuss operational issues associated with the interpretation and implementation of policy at the zero bound in relation to the recent situation in Japan.