Money & Banking News
November 2007
Click on these links to read some recent readings related to the textbook Money
and Banking: A Policy-Oriented Approach by Dean Croushore.
In this issue:
1. Recent Events in Financial Markets
2. Headline versus Core Inflation in the Conduct of Monetary Policy
3. Monetary Policy Under Uncertainty
4. The Role of Money in Monetary Policy: Why Do the Fed and ECB See It
So Differently?
Recent Events in Financial Markets
In the turmoil of financial markets in 2007, it is easy to wonder why sensible investors put their
funds in securitized assets backed by subprime mortgages. As we discussed in Chapter 2,
investors care about risk, so why would they invest in assets whose risks they do not understand.
In this article, Federal Reserve governor Randall Kroszner explains why he thinks this happened.
Some investors failed to do “sufficient due diligence” while others only came to realize after the
fact how complex these assets were. Kroszner suggests that the recovery will be slow and
gradual.
Speech at the Institute of International Bankers Annual Breakfast Dialogue, Washington, D.C.,
October 22, 2007.
Headline versus Core Inflation in the Conduct of Monetary Policy
Chapter 17 describes the differences between core inflation and overall inflation. In this article,
Federal Reserve governor Frederic Mishkin talks about the differences and shows why the Fed
should analyze both measures. He illustrates that if the Fed were to respond to headline inflation
instead of core inflation, then a temporary supply shock would lead the Fed to respond too
strongly with monetary policy, causing unemployment to rise more than it would if the Fed
responded to core inflation. But he also describes why the Fed should still pay attention to
headline inflation.
Speech at the Business Cycles, International Transmission and Macroeconomic Policies
Conference, HEC Montreal, Canada, October 20, 2007.
Monetary Policy Under Uncertainty
In Chapter 18, we noted that one of the main difficulties of making monetary policy in practice is
dealing with uncertainty. In this speech, Fed chairman Ben Bernanke discusses recent
contributions to how monetary policymakers need to deal with uncertainty. He outlines issues
related to the breakdown of money demand relationships, the challenge of data revisions, the use
of dynamic factor models, dealing with worst-case scenarios, the use of simple rules that work
well in many economic models, and dealing with how people form expectations.
Speech at the Economic Policy Conference, Federal Reserve Bank of Saint Louis, October 19,
2007.
The Role of Money in Monetary Policy: Why Do the Fed and ECB See It So
Differently?
Central banks in different countries learn from each other and often have the same basic goals,
especially the goal of keeping inflation low, as we discuss in Chapter 18. Comparing the Federal
Reserve in the United States with the European Central Bank, there is one major difference in
how they operate: the ECB puts more emphasis on the money supply. In this article, George
Kahn and Scott Benolkin describe the reasons why the ECB focuses more on the money supply
than the Fed does.
Federal Reserve Bank of Kansas City Economic Review, Third Quarter 2007, pp. 5–36.