Uncertainty and monetary policy rules in the United States

“Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape” (Greenspan 2003).

Uncertainty is a central issue in monetary policy, as the quote from Alan Greenspan above illustrates. Empirical models, however, rarely take account of this, effectively assuming that policymakers ignore uncertainty. The evident focus of policymakers on uncertainty suggests that this assumption is invalid and therefore that empirical models of monetary policy must account for uncertainty. This article considers the effects of uncertainty about the true state of the economy on monetary policy, estimating a monetary policy rule that allows for this.

Our empirical model combines elements of Svensson’s (1997) model of inflation forecast targeting with models drawn from the theoretical literature on optimal monetary policy when there is uncertainty about the true state of the economy, most prominently Svensson and Woodford (2003, 2004) and Swanson (2004). In existing models of monetary policy under certainty, monetary policy affects inflation and the output gap directly, so it is optimal for policymakers to use these variables in forming monetary policy. This is the basis for the Taylor rule (Taylor 1993) model of monetary policy and its subsequent refinements (e.g., Woodford 2003).

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Online Education – Today’s Buzzword

Students world over are whole-heartedly accepting online education. The advantages of online education have made it the popular mode of education among the students of all age groups in all parts of the world. This growing popularity of online education has led to the emergence of a large number of educational institutions offering online education for a wide range of subjects. The growth of educational institutions offering relearning facilities has been significantly high in the US, Europe and the developed nations of the world.

Online Education- Changing Perception

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Taking stock: monetary policy transmission to equity markets.(analysis)

ONE CENTRAL ARGUMENT of James Tobin’s seminal 1969 Journal of Money, Credit and Banking paper was that “financial policies” can play a crucial role in altering what later became known as Tobin’s q, the market value of a firm’s assets relative to their replacement costs. Tobin emphasized that, in particular, monetary policy can change this ratio. This 1969 JMCB paper together with another of his contributions (Tobin 1978) became a key element in the formulation and understanding of the stock market channel of monetary policy transmission. Tobin’s argument in this work was that a tightening of monetary policy, which may result from an increase in inflation, lowers the present value of future earning flows and hence depresses equity markets.

The second part of Tobin’s argument, namely the relationship between monetary policy and equity prices, is still not very well understood. On the one hand, it has proven difficult to properly identify monetary policy, since monetary policy may be endogenous in that central banks might react to developments in stock markets. Considerable progress has recently been made in this respect. Rigobon and Sack (2002, 2003) develop a methodology that exploits the heteroskedasticity present in financial markets to identify monetary policy shocks, while Kuttner (2001) and Bernanke and Kuttner (2003) derive monetary policy shocks through measures of market expectations obtained from federal funds futures contracts. In this paper, we will employ a methodology similar to Bernanke and Kuttner (2003), by identifying monetary policy shocks through market expectations obtained from surveys of market participants.

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