What happened in Cyprus

This policy letter sheds light on the economic and political backround in Cyprus and provides an analyses of the factors which lead to an intensification of the crisis there. It discusses the severe consequences of the errors made in the recent establishment of an adjustment program for Cyprus by the Europroup for European economic management as a whole

Activist stabilization policy and inflation : the Taylor rule in the 1970s

A number of recent studies have suggested that activist stabilization policy rules responding to inflation and the output gap can attain simultaneously a low and stable rate of inflation as well as a high degree of economic stability. The foremost example of such a strategy is the policy rule proposed by Taylor (1993). In this paper, I demonstrate that the policy settings that would have been suggested by this rule during the 1970s, based on real-time data published by the U.S. Commerce Department, do not greatly differ from actual policy during this period. To the extent macroeconomic outcomes during this period are considered unfavorable, this raises questions regarding the usefulness of this strategy for monetary policy. To the extent the Taylor rule is believed to provide a reasonable guide to monetary policy, this finding raises questions regarding earlier critiques of monetary policy during the 1970s

Monetary policy rules, macroeconomic stability and inflation: a view from the trenches

I estimate a forward-looking monetary policy reaction function for the Federal Reserve for the periods before and after Paul Volcker's appointment as Chairman in 1979, using information that was available to the FOMC in real time from 1966 to 1995. The results suggest broad similarities in policy and point to a forward looking approach to policy consistent with a strong reaction to inflation forecasts during both periods. This contradicts the hypothesis, based on analysis with ex post constructed data, that the instability of the Great Inflation was the result of weak FOMC policy responses to expected inflation. A difference is that prior to Volcker's appointment, policy was too activist in reacting to perceived output gaps that retrospectively proved overambitious. Drawing on contemporaneous accounts of FOMC policy, I discuss the implications of the findings for alternative explanations of the Great Inflation and the improvement in macroeconomic stability since then JEL Classification: E3, E52, E58Greenbook forecasts, monetary policy rules, real-time data, stagflation

Expectations, open market operations, and changes in the federal funds rate (commentary)

Open market operations ; Federal funds rate ; Rational expectations (Economic theory)

Knowledge discovery through creating formal contexts

Knowledge discovery is important for systems that have computational intelligence in helping them learn and adapt to changing environments. By representing, in a formal way, the context in which an intelligent system operates, it is possible to discover knowledge through an emerging data technology called Formal Concept Analysis (FCA). This paper describes a tool called FcaBedrock that converts data into Formal Contexts for FCA. The paper describes how, through a process of guided automation, data preparation techniques such as attribute exclusion and value restriction allow data to be interpreted to meet the requirements of the analysis. Creating Formal Contexts using FcaBedrock is shown to be straightforward and versatile. Large data sets are easily converted into a standard FCA format

Complexity and monetary policy : [Version August 10, 2012]

The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables

Knowledge discovery through creating formal contexts

Knowledge discovery is important for systems that have computational intelligence in helping them learn and adapt to changing environments. By representing, in a formal way, the context in which an intelligent system operates, it is possible to discover knowledge through an emerging data technology called formal concept analysis (FCA). This paper describes a tool called FcaBedrock that converts data into formal contexts for FCA. This paper describes how, through a process of guided automation, data preparation techniques such as attribute exclusion and value restriction allow data to be interpreted to meet the requirements of the analysis. Examples are given of how formal contexts can be created using FcaBedrock and then analysed for knowledge discovery, using real datasets. Creating formal contexts using FcaBedrock is shown to be straightforward and versatile. Large datasets are easily converted into a standard FCA format

Complexity and monetary policy

The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables

Economic projections and rules-of-thumb for monetary policy

Monetary policy analysts often rely on rules-of-thumb, such as the Taylor rule, to describe historical monetary policy decisions and to compare current policy to historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple rule and examination of the reasons behind such deviations. One interesting question is whether such rules-of-thumb should draw on policymakers "forecasts of key variables such as inflation and unemployment or on observed outcomes. Importantly, deviations of the policy from the prescriptions of a Taylor rule that relies on outcomes may be due to systematic responses to information captured in policymakers" own projections. We investigate this proposition in the context of FOMC policy decisions over the past 20 years using publicly available FOMC projections from the biannual monetary policy reports to the Congress (Humphrey-Hawkins reports). Our results indicate that FOMC decisions can indeed be predominantly explained in terms of the FOMC´s own projections rather than observed outcomes. Thus, a forecast-based rule-of-thumb better characterizes FOMC decision-making. We also confirm that many of the apparent deviations of the federal funds rate from an outcome-based Taylor-style rule may be considered systematic responses to information contained in FOMC projections