St. Louis Fed's Review: Do the Markets Believe the Fed Has an Implicit Inflation Target?; Milton Friedman and U.S. Monetary Policy: 1961-2006; Granger Causality and Equilibrium Business Cycle Theory; The GSEs: Where Do We Stand?

ST. LOUIS — The May/June 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 on the St. Louis Fed's web site: https://research.stlouisfed.org/publications/review/.

• "The Lower and Upper Bounds of the Federal Open Market Committee's Long-Run Inflation Objective." Some 21 countries have adopted targets for inflation. Japan and the United States stand out among industrialized nations as not having one. Because of the Federal Open Market's (FOMC) ability to control inflation in the long run and its commitment to price stability, economist Daniel L. Thornton argues that it's reasonable to assume that the financial markets have a perception of the FOMC's implicit long-run inflation objective (LIO). He suggests that that the FOMC could alleviate the remaining uncertainty by formally announcing an LIO, which has been recommended by Fed Chairman Ben Bernanke.
• "Milton Friedman and U.S. Monetary Policy: 1961-2006." Using extensive archival material from several countries, economist Edward Nelson brings together scattered information about Milton Friedman's views and predictions regarding U.S. monetary policy developments after 1960 (the period beyond that covered by his and Anna Schwartz's Monetary History of the United States). Nelson finds that the 1960s and '70s were notable for resistance by policymakers to, then acceptance of, Friedman's consistently held views on exchange rates and the control of inflation.
• "Granger Causality and Equilibrium Business Cycle Theory?" U.S. data suggest a "causal" relationship running from aggregate consumption to GDP and then to aggregate business investment. Economist Yi Wen says this causal relationship may be surprising to some economists but not to a businessperson. According to the latter's intuition, production would not rise until consumption demand rises, and investment would not rise until profit rises along with production. The elements missing in the businessperson's intuition, Wen argues, are general equilibrium considerations on the aggregate resource constraint and the price mechanism. He studies whether standard general equilibrium business cycle models are able to explain the causal relationship found in the data. He concludes that they do not.
• "The GSEs: Where Do We Stand?" This is a reprint of speech delivered on Jan. 17, 2007, in St. Louis by William Poole, president of the Federal Reserve Bank of St. Louis, to the Chartered Financial Analysts of St. Louis.

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