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This paper uses a structurally estimated macroeconometric model, denoted the MC model, to evaluate in ation targeting in the United States. Various interest rate rules are tried with differing weights on in ation and output, and various optimal control problems are solved using differing weights on in ation and output targets. Price-level targeting is also considered. The results show that 1) there are output costs to in ation targeting, especially for price shocks, 2) price-level targeting is dominated by in ation targeting, 3) the estimated interest rate rule of the Fed (in Table 4) is consistent with the Fed placing equal weights on in ation and unemployment in a loss function, 4) the estimated interest rate rule does a fairly good job at lowering variability, and 5) considerable economic variability is left after the Fed has done its best. Overall, the results suggest that the Fed should continue to behave as it has in the past. 1

This paper uses a structurally estimated macroeconometric model, denoted the MC model, to evaluate inflation targeting in the United States. Various interest rate rules are tried with differing weights on inflation and output, and various optimal control problems are solved using differing weights on inflation and output targets. Price-level targeting is also considered. The results show that 1) there are output costs to inflation targeting, especially for price shocks, 2) price-level targeting is dominated by inflation targeting, 3) the estimated interest rate rule of the Fed (in Table 4) is consistent with the Fed placing equal weights on inflation and unemployment in a loss function, 4) the estimated interest rate rule does a fairly good job at lowering variability, and 5) considerable economic variability is left after the Fed has done its best. Overall, the results suggest that the Fed should continue to behave as it has in the past.

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This paper examines a shift in the dynamics of the term structure of interest rates in the U.S. during the mid-1980s. We document this shift using standard interest rate regressions and using dynamic, a ne, no-arbitrage models estimated for the pre- and post-shift subsamples. The term structure shift largely appears to be the result of changes in the pricing of risk associated with a level factor. Using a macro-nance model, we suggest a link between this shift in term structure behavior and changes in the dynamics and risk pricing of the Federal Reserves ination target as perceived by investors.

gathered to observe a demonstration. At the front of the room was a sevenfoot-tall contraption assembled out of plastic pipes, tanks, valves and other plumbing hardware. The device, later dubbed the MONIAC, was a hydraulic analog computer for modeling the flow of money through a national economy. When the machine was powered up, colored water gurgled through the transparent tubes and sloshed into reservoirs. Various streams represented consumption, investment, taxes, savings, imports and exports. Crankwheels and adjustable cams allowed the water levels and flows to be regulated—the hydraulic equivalent of setting interest rates or tax policies. This was real trickle-down economics! The MONIAC attracted much attention, and it lives on in folklore. Later generations of students called it the “pink lemonade national income machine.” Punch magazine tried to satirize the device, but their cartoon was really no more outlandish than the construction drawings for the machine itself. There are tales of leaks; according to one source, the machine couldn’t cope with inflation, which caused red fluid to squirt out through a hole in one of the cylinders. And then there’s the story about the Chancellor of the Exchequer and the Governor of the Bank of England; when they were given a turn at the controls, the results showed “why the U.K. economy was in the state it was.” This is all good fun, but the MONIAC was not just a toy or a joke. It embodied a style of thinking about economic problems that may still be Brian Hayes is senior writer for American Scientist. Additional material related to the “Computing Science ” column appears in Hayes’s blog at

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A decade (and a global financial crisis) after blinder the interaction between researchers and policy-makers in central banks

We assess the stability of open economy backward-looking Phillips curves estimated over two differentexchangerateregimes. Wecalibrate a new-Keynesian monetary policy model and employ it for producing artificial data. A monetary policy break replicating the move from a Target-Zone regime to a Free-Floating regime implemented in Sweden in 1992 is modeled. We employ two different, plausibly calibrated Taylor rules to describe the Swedish monetary policy conduct, and fit a reduced-form Phillips curve to the artificial data. While not rejecting the statistical relevance of the Lucas critique, we find that its economic importance does not seem to be overwhelming.