St. Louis Fed's Review: Oil Price Volatility and U.S. Macroeconomic Activity; An Analysis of Recent Studies on the Effect of Foreign Exchange Intervention; Discrete Monetary Policy Changes and Changing Inflation Targets in Estimated Dynamic Stochastic General Equilibrium Models; Revisions to User Costs for the Federal Reserve Bank of St. Louis Monetary Policy Indices

ST. LOUIS — The November/December issue of Review, the Federal Reserve Bank of St. Louis' journal of economic and business issues, features the following articles. The publication is also available online.

• "Oil Price Volatility and U.S. Macroeconomic Activity." Many economists are just as alarmed at rising gasoline prices as consumers because most of the recessions that have occurred after World War II were preceded by sharp increases in crude oil prices. Economists Hui Guo and Kevin L. Kliesen analyze rising oil prices and find that the volatility of those prices is mainly driven by random events, such as a terrorist attack or a conflict in the Middle East.
• "An Analysis of Recent Studies on the Effect of Foreign Exchange Intervention." Researchers have often studied whether foreign exchange interventionthe practice of buying and selling currency in the foreign exchange market to influence exchange ratesis successful in influencing exchange rates movements and how it affects volatility. Two recent areas of research have contributed to a better understanding of the effects of foreign exchange intervention: the use of high-frequency data and the use of event studies. Generally speaking, the latter is an examination of the behavior of asset prices associated with some event, such as a merger, for example. Economist Christopher J. Neely surveys the recent empirical studies of the effect of foreign exchange intervention and analyzes the implicit assumptions and limitations of those studies. He concludes by offering some ways to better investigate the effects of intervention.
• "Discrete Monetary Policy Changes and Changing Inflation Targets in Estimated Dynamic Stochastic General Equilibrium Models." Many estimated macroeconomic models assume interest rate smoothing. In practice, monetary policymakers adjust a target level for the federal funds rate by discrete increments. An often-neglected consequence of using a quarterly average of the daily federal funds rate in empirical work is that any change in the target federal funds rate will affect the quarterly average in both the current and subsequent quarter. As a result, policy equations that include interest rate smoothing inadvertently make the strongand unnecessaryassumption that the starting point for interest rate smoothing is the last quarter's average level of the fed funds rate. In fact, the end-of-quarter target level of the fed funds closely approximates the starting point for interest rate smoothing. This distinction matters because doctoral candidate Anatoliy Belaygorod and economist Michael J. Dueker find that monetary policy appears to have more influence on the behavior of the real economy when one accounts for the discreteness of monetary policy actions.
• "Revisions to User Costs for the Federal Reserve Bank of St. Louis Monetary Policy Indices." Economist Richard G. Anderson and research analyst Jason Buol discuss recent changes to the user cost figures that are computed as part of the St. Louis Fed's monetary services indices.

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