We estimate a forward-looking monetary policy reaction function for the postwar United States economy, before and after Volcker’s appointment as Fed Chairman in 1979. Our results point to substantial differences in the estimated rule across periods. In particular, interest rate policy in the Volcker-Greenspan period appears to have been much more sensitive to changes in expected in�ation than in the pre-Volcker period. We then compare some of the implications of the estimated rules for the equilibrium properties of in�ation and output, using a simple macroeconomic model, and show that the Volcker-Greenspan rule is stabilizing. I.

Abstract: Drawing on evidence from a large sample of speculative attacks in developed and developing economies, this paper argues that the answer to the question posed in the title is ”no”. In particular, this paper documents a striking lack of any systematic association whatsoever between interest rates and the outcome of speculative attacks. The lack of clear empirical evidence on the effects of high interest rates during speculative attacks mirrors the theoretical ambiguities on this issue. ____________________ 1818 H Street, N.W. Washington, DC 20433, (202) 473-5756,

This paper studies the conditions under which price stability is the optimal policy in a two-country open-economy model with imperfect competition and price stickiness. Special conditions on the levels of country-specific distortionary taxation and the intratemporal and intertemporal elasticities of substitution need to be satisfied. These restrictions apply to both cooperative and non-cooperative settings. Most importantly, we show that cooperative and non-cooperative solutions do not coincide despite market completeness and producer currency pricing. In this framework, our analysis suggests a role for international policy coordination. 1

INTRODUCTION The Maastricht route to economic and monetary union (EMU) prescribed that a process of convergence must precede the launching of the common currency into a stable economic environment. In 1991, Europe thus embarked on policies considered conducive to convergence and stability. In retrospect, economic performance over the convergence period was characterised by two key developments: inflation was brought down successfully and price trends converged, on the one hand, while unemployment soared to unprecedented levels, on the other. In addition, mirroring that drastic deterioration in the employment situation, Europe's debt/GDP-ratio increased by some 15% between 1991 to 1997. Our objective is to investigate what lessons may be learned from the experience over the convergence period. A sound diagnosis of the deeper causes of this miserable legacy is crucial. For a failure to properly understand our past follies is bound to lead to false

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: The expectations hypothesis is a theory of the term structure of interest rates that describes a conventional view of the transmission mechanism of monetary policy. According to the expectations hypothesis, bond rates are related to current and expected movements in the policy-controlled rate. However, empirical rejections of the expectations hypothesis are commonplace and lead many to question this description of policy transmission. This paper argues that failure to account for imperfect policy credibility may explain empirical rejections. Empirical rejections may occur even when changing anticipations of future short rates are the primary source of variation in bond rates and the standard term structure transmission channel remains valid. Keywords: Changepoints, expectations hypothesis, nonstationary inflation, shifting endpoint. JEL: E43, E52, E47 Authors' addresses are Federal Reserve Bank of Kansas City, 925 Grand Boulevard, Kansas City, MO, 64198 USA, sharon.kozicki@kc.frb.org; and Faculty of Economics and Politics, University of Cambridge, Cambridge CB3 9DD, UK, ptinsley@econ.cam.ac.uk. We are grateful for comments from Mark Gertler, session participants at the 2001 AEA meetings, and seminar participants at the Federal Reserve Bank of Kansas City. Special thanks to Jeff Fuhrer who provided us with code to estimate forward-looking macro models using AIM. The views expressed are those of the authors and do not necessarily represent those of the Federal Reserve Bank of Kansas City or the Federal Reserve System. 1

This paper reexamines the oil price-macroeconomy relationship with rolling Granger causality and structural stability tests. It finds that the relationship broke down amidst the falling oil prices and market collapse of the 1980s, suggesting misspecification of the oil price rather than a weakened relationship. Some proposed respecifications of the oil price yield considerable improvements, although they are not sufficient to achieve Granger causality of output unless interest rates are excluded from the VAR. There is some support for the explanation that oil prices affect the economy indirectly by inducing monetary policy responses, but this is incomplete and some evidence of misspecification remains.

This paper recasts Temin's (1976) question of whether monetary forces caused the Great Depression in a recursive time series framework. We adopt Bayesian updating techniques for estimation and forecasting to spot structural breaks and monetary regime changes. Examining traditional and credit channels of transmission, we find very little predictive power of monetary policy for output in the downturn and after 1931. During the propagation phase of 1930-31, monetary policy forecasts output correctly at a one-month horizon but invariably predicts recovery at longer horizons. The impulse response functions exhibit remarkable structural instability and react strongly to monetary regime changes during the depression. The explanatory power of monetary policy as measured by the variance decompositions is generally low and reacts to the same regime changes. In line with the Lucas (1976) critique, this suggests that the money- income relationship was endogenous to policy regimes and not among the deep parameters of the U.S. economy. Experimenting with non-monetary alternatives, we find strong evidence for a downturn in investment, which predicts a major recession already in early 1929. Given the highly erratic statistical performance of monetary instruments and the strong showing of leading indicators on real activity, we remain skeptical with regard to a monetary interpretation of the Great Depression in the U.S.

Wolters. The views expressed in this paper represent exclusively the opinion of the authors and do not necessarily reflect those of the European Central Bank. The usual disclaimer applies. © European Central Bank, 2000 Address Kaiserstrasse 29

Do high interest rates defend currencies during speculative attacks? Or do they have the perverse effect of increasing the probability of a devaluation of the currency under attack? Drawing on evidence from a large sample of speculative attacks in developed and developing economies, this paper argues that the answer to both questions is "no". In particular, this paper documents a striking lack of any systematic association whatsoever between interest rates and the outcome of speculative attacks. The lack of clear empirical evidence on the effects of high interest rates during speculative attacks mirrors the theoretical ambiguities on this issue.