Copyright © 2018 by the Cato Institute All rights reserved ISBN: 978-1-948647-14-4 eBook ISBN: 978-1-948647-15-1 Library of Congress Cataloging-in-Publication Data available Printed in the United States of America Cover design: Jon Meyers and Mai Makled Cato Institute 1000 Massachusetts Avenue, N.W Washington, D.C 20001 www.cato.org CONTENTS EDITOR’S PREFACE PART LESSONS FROM THE CRISIS Chapter Rethinking Central Banking Gerald P O’Driscoll Jr Chapter Sorting Out Monetary and Fiscal Policies Mickey D Levy Chapter Learning the Right Lessons from the Financial Crisis Kevin Dowd and Martin Hutchinson Chapter The New Monetary Framework Jerry L Jordan Chapter Liquidity Risk after the Crisis Allan M Malz PART EXIT STRATEGY AND NORMALIZATION Chapter Exit Strategies from Monetary Expansion and Financial Repression Gunther Schnabl Chapter Needed: A Federal Reserve Exit from Preferential Credit Allocation Lawrence H White Chapter The Optimum Quantity of Money and the Zero Lower Bound J Huston McCulloch Chapter Normalizing Monetary Policy Martin Feldstein Chapter 10 Priorities on the Path to Normalization Kevin Warsh Chapter 11 Interest on Excess Reserves: The Hobie Cat Effect George Selgin PART MONETARY RULES Chapter 12 Monetary Policy in an Uncertain World: The Case for Rules James A Dorn Chapter 13 Reforming the Rules That Govern the Fed Charles W Calomiris Chapter 14 Improving Monetary Policy by Adopting a Simple Rule Athanasios Orphanides Chapter 15 Nudging the Fed Toward a Rules-Based Policy Regime Scott Sumner PART INTERNATIONAL MONETARY REFORM Chapter 16 Toward a Rules-Based International Monetary System John B Taylor Chapter 17 Some Thoughts on International Monetary Policy Coordination Charles I Plosser Chapter 18 The Case for a New International Monetary System Judy Shelton INDEX EDITOR’S PREFACE T en years after the 2008 financial crisis we are again facing the possibility of economic turmoil as the Fed and other central banks exit their unconventional monetary policies by raising interest rates and shrinking their balance sheets Although central banks will move gradually, unforeseen circumstances could trigger a flight to safety and a collapse of asset prices that had previously been stimulated by near-zero interest rates and large-scale asset purchases, popularly known as “quantitative easing.” This book brings together leading scholars and former policymakers to draw lessons from the decade of unconventional monetary policies relied upon to stimulate the global economy in the aftermath of the financial crisis The articles included in this book combine historical perspectives and forward-looking views of the Fed’s exit strategy and monetary normalization, along with the arguments for a rules-based monetary policy both at the domestic and international levels Kevin Warsh, a former member of the Board of Governors of the Federal Reserve System, reminds us in his article that, although the economy has improved since the crisis, the tasks facing the Fed are still large “So we should resist allowing the policy debate to be small or push aside ideas that depart from the prevailing consensus The Fed’s job is not easier today, and its conclusions are not obvious.” The contributors to this volume meet Warsh’s challenge by questioning the status quo and offering fresh ideas for improving monetary policy The financial crisis highlighted the uncertainty that confronts policymakers Having failed to prevent the 2008 financial crisis and the Great Recession, the Federal Reserve and other major central banks all subsequently adopted similar policies characterized by near-zero interest rates, quantitative easing and forward guidance Those unconventional monetary policies were designed to increase risk taking, prop up asset prices, increase spending and restore full employment While asset prices have risen and unemployment is at historic lows, the Fed’s balance sheet ballooned from about $800 billion before the crisis to more than $4 trillion today, and the long period of near-zero interest rates has created a series of asset bubbles, which risk being burst as interest rates rise again Moreover, the Fed has engaged in preferential credit allocation through its large-scale asset purchase program, in which it has acquired billions of dollars’ worth of mortgage-backed securities and shifted out of short-term Treasuries to longer-term government debt In order to expand its balance sheet, the Fed has radically changed its operating procedure Instead of engaging in open market operations nudging the policy rate toward a single target rate by buying and selling short-term Treasuries, the Fed now establishes a target range for the funds rate—with the rate of interest on excess reserves (IOER), introduced in October 2008, as its upper limit and the Fed’s overnight reverse repurchase (ON RRP) agreement rate as its lower limit Because the IOER exceeds comparable market rates, some banks now find it worthwhile to accumulate excess reserves instead of trading them for other assets The economy is, in other words, kept in a purpose-made “liquidity trap,” so that the traditional monetary “transmission mechanism” linking increases in the monetary base to changes in bank lending, overall spending, and inflation, no longer functions as it once did Under the new operating arrangements, the Fed changes its policy stance by changing its IOER and ON RRP rates, thereby influencing not the supply of but the demand for the Fed’s deposit balances Meanwhile, the Fed’s regulatory powers have increased dramatically as well The Federal Reserve System, which was intended to be decentralized so that policymakers would take account of divergent ideas, has become even more centralized with each new crisis As a result, monetary policy has also become more politicized Finally, the lack of any systematic policy rule to guide long-run decisions has increased regime uncertainty The so-called knowledge problem—and the limits of monetary policy—need to be widely recognized Policymakers err by paying too much attention to short-run remedies and too little attention to the long-run consequences of current decisions If human judgments were perfect, then purely discretionary monetary policy would be ideal However, as Karl Brunner (1980: 61) wisely noted, the reality is that: We suffer neither under total ignorance nor we enjoy full knowledge Our life moves in a grey zone of partial knowledge and partial ignorance [Consequently], a nonactivist [rules-based] regime emerges as the safest strategy It does not assure us that economic fluctuations will be avoided But it will assure us that monetary policymaking does not impose additional uncertainties on the market place Before serious consideration can be given to implementing any rules-based monetary regime, the Fed needs to normalize monetary policy by ending interest on excess reserves and shrinking its balance sheet to restore a precrisis federal funds market Once changes in base money can be effectively transmitted to changes in the money supply and nominal income, the Fed can then implement a rules-based regime to reduce uncertainty and spur investment and growth The ideas put forth in this volume for monetary reform are meant to inform policymakers and the public about the importance of maintaining a credible monetary policy regime both for financial stability and economic prosperity Ensuring long-run price stability, letting market forces set interest rates and allocate credit, and keeping nominal income on a steady growth path will create new opportunities and widen the scope of markets to promote economic performance I thank the contributors to this volume for their work which will help us better understand the complexities of monetary policy and the remedies that can help us prevent future crises Special thanks go to The George Edward Durell Foundation which has long supported the Cato Institute’s work on monetary policy All the articles in this volume were first presented at the annual monetary conferences and appeared in various issues of the Cato Journal, with the exception of George Selgin’s article, which first appeared in Alt-M Finally, I would like to thank my colleagues at the Center for Monetary and Financial Alternatives for ongoing conversations that have deepened my knowledge of monetary history and policy, and to our donors who have generously supported our efforts to give monetary and financial institutions the attention they deserve —J A Dorn Reference Brunner, K (1980) “The Control of Monetary Aggregates.” In Controlling Monetary Aggregates III, 1–65 Boston: Federal Reserve Bank of Boston ABOUT THE CATO INSTITUTE AND ITS CENTER FOR MONETARY AND FINANCIAL ALTERNATIVES Founded in 1977, the Cato Institute is a public policy research foundation dedicated to broadening the parameters of policy debate to allow consideration of more options that are consistent with the principles of limited government, individual liberty, and peace The Institute is named for Cato’s Letters, libertarian pamphlets that were widely read in the American colonies in the early 18th century and played a major role in laying the philosophical foundation for the American Revolution The Cato Institute undertakes an extensive publications program on the complete spectrum of policy issues Books, monographs, and shorter studies are commissioned to examine the federal budget, Social Security, regulation, military spending, international trade, and myriad other issues Major policy conferences are held throughout the year The Cato Institute’s Center for Monetary and Financial Alternatives was founded in 2014 to assess the shortcomings of existing monetary and financial regulatory arrangements, and to discover and promote more stable and efficient alternatives In order to maintain its independence, the Cato Institute accepts no government funding Contributions are received from foundations, corporations, and individuals, and other revenue is generated from the sale of publications The Institute is a nonprofit, tax-exempt, educational foundation under Section 501(c)3 of the Internal Revenue Code CATO INSTITUTE 1000 Massachusetts Avenue, N.W Washington, D.C 20001 www.cato.org George, Esther, 12 Germany default in postwar, 115 “flash crashes” in, 85 government debt in, 106f growth in, 111f hyperinflation in, 248, 250, 256 investment as percentage of GDP in, 111f labor productivity growth in, 110f prices in, 108f Glass Plan, 12 globalization, 112, 113n15, 291 Goldman Sachs, 46 gold reserves, 299 gold standard, 35–36, 59, 61, 186–87, 198, 283–84, 296–300 Gold Standard Act of 1900, 35 “gold window,” 59, 191 Gordon, Robert, 193n15 governance, in banking, restoration of strong, 46–48 government debt in Basel system, 39 entitlements and, 22 fiscal policies and, 19 in G4 countries, 106f in Greece, 59–60 held by Fed, 26 in income accounting, 66n1 and interest on excess reserves, 141 interest rates and, 28, 65, 106, 106f, 107, 116, 142 management policies, 77–78 monetary policy and, 29 rising, 20, 33 government-sponsored enterprises (GSEs), 48, 66–67, 92–93, 128–29, 129f, 197 Great Contraction, 189 See also Great Depression Great Depression, 13–14, 63, 185–86, 207, 253 Great Inflation, 8, 208, 259 Great Moderation, 8, 182 Great Recession contractionary response to, 249–50 danger of another, vii disappointing aftermath of, 33–34, 33n1 and elasticity of credit, 13–14 inflation and, 63 interest rates and, 77 labor and, 63–64 liquidity risk after, 73–100, 84f, 87f, 88f, 90f, 92f, 94f–97f, 99f mortgage-backed securities in, 66–67 mortgage crisis in, 62–63 near-zero interest rates and, vii–viii regime prior to, 140–41 unemployment and, 63–64 Greece, 59–60 Greenbacks, 3, Greenspan, Alan, 9, 215n1, 219, 300 “group think,” 209 growth central banks and, 57–58 in emerging markets, 114–15 financial repression and, 107–10, 108f, 110f, 111f in G4 countries, 111f inflation and, 220 innovation and, 109–10 investment as percentage of, 111f GSEs See government-sponsored enterprises (GSEs) Gutfreund, John, 47 Haber, Stephen, 231 Hall, Robert, 193n15 Hayek, F A., 4, 4n3, 5, 108n4, 109n7, 112, 115, 116n20, 183, 184, 190 Hetzel, Robert, 249n3 Higgs, Robert, 179 History of the Federal Reserve (Meltzer), 219 Hobie Cat effect, 173–74, 174f Hubbard, Glenn, 183 Hummel, Jeffrey, 9, 133n10, 135 hyperinflation, in Germany, 248, 250, 256 identification problem, 74, 77, 77n4 inflation arguments for rise in, 163 asset prices and, 161, 189 base money and, 253–54 as completely Fed-controlled, 219–20 expectations about, 239 feedback from, 149 in Germany, 248, 250 gold standard and, 35 Great Recession and, 63 growth and, 220 hyper, 248, 250, 256 innovation and, 25 interest on excess reserves and, 130–31 interest rates and, 66n2, 89–90, 108n4, 114n15, 116n20, 161 money supply and, 219–20 natural interest rate and, 108n4, 168 neo-Fisherian view of, 91n19 output gap and, 149 personal consumption expenditure index of, 166 in pre-2008 regime, 140–41 premium, 70–71 price stability and, 167 quantitative easing and, 260 targeting, 163, 166–69, 193, 257 taxes and, 63 Taylor rule and, 192–93 zero lower bound and, 149–50 inflation bias, 221 innovation economic slack and, 64 financial repression and, 109–10 growth and, 58, 109–10 inflation and, 25 liquidity and, 117 slowdown in, 59 instability, political, 110–13, 113f, 277–78 insurance, deposit, 37, 48–49, 79, 80, 93, 144 interest on excess reserves (IOER), viii arbitrage and, 197 Bernanke on, 172–73 federal funds rate and, 92, 95f Federal Home Loan Banks and, 134–35 fiscal policy and, 27 floor system and, 26, 174–75 Hobie Cat effect and, 173–74, 174f inflation and, 130–31 interest on required reserves and, 143–44 lending and, 24, 196n21 liquidity and, 92 money supply and, 196n21 negative, 196n21 quantitative easing and, 127–28, 132–33 since 2008, 141–42 unwinding of, 143 interest on required reserves (IORR), 143–44 interest on reserves (IOR), 11, 67–68, 69, 78, 80, 92, 93, 127, 144, 172–73, 211t, 229–30 interest rates See also federal funds rate; natural interest rate arbitrage and, 151 asset prices and, 107–9, 108f, 157, 162–63 Bernanke on, 250–51 consumption and, 56–57, 108n4, 150, 161 cyclicality and, 108n4 debt and, 28, 106, 106f equilibrium, 90, 91n19, 107, 146, 149, 149n4, 161–62, 188, 278 expansionist monetary policy and, 109 Friedman on, 251–52 inflation and, 66n2, 89–90, 108n4, 114n15, 116n20, 161 liquidity risk and, 82–83 lobbying on, 7–8 market expectations of vs Fed expectations, 99–100, 99f monetary base vs nominal, 253–54 monetary expansion and, 114n15 monetary stimulus and, 56–58 natural, 90f, 108n4, 109, 115–16, 117, 149, 149n4, 152–53, 168, 188, 193, 225, 238, 240, 256 near-zero, vii–viii, 105–6 negative, 105n1 nominal market, 56–57 normalization and, 99–100 overinvestment and, 109n6 reserve balances and, 272–73 shadow, 105n1, 112, 113f since Great Recession, 77 “soft budget constraints” and, 109 and stance of monetary policy, 248–49 as unreliable indicator, 251–54 yield curve and, 117–18 zero, 57, 66n2, 250 international coordination of monetary policy Bretton Woods in, 284–85 commitment in, 285–86 credibility in, 285–86 fixed vs flexible exchange rates in, 286–87 gold standard in, 283–84 history of, 283–85 recent efforts in, 287–89 International Monetary Fund, 160, 284, 295, 298–99 international monetary system, new future prosperity and, 292–93 preemptive reform in, 295–98 U.S leadership in, 294–95 inventory demand for money, 146, 147, 148f IOER See interest on excess reserves (IOER) IOR See interest on reserves (IOR) IORR See interest on required reserves (IORR) Japan, 270, 271, 273, 273t, 274–75 See also Bank of Japan balances of commercial banks at central bank in, 114n15 default in postwar, 115 GDP deflator in, 260 growth in, 111f interest rates in, 247, 250–51 investment as percent of GDP in, 111f Keynesianism in, 34 labor productivity growth in, 110f monetary base in, 254 regulation in, 40n5 Johnson, Lyndon, 59 Johnson, Simon, 40–41 JP Morgan bank, 81 Keynesian economics, 34, 145, 168, 216, 248, 249 King, Mervyn, 45 knowledge problem, viii–ix, 4–5, 64, 166–67, 182–84, 194 Kohn, Don, 144 k percent rule, 193, 193n13, 240n3 Krugman, Paul, 172, 262 Kuroda, Haruhiko, 275 Lagarde, Christine, 299 large-scale asset purchase programs (LSAPs), 23, 65, 68–69, 158 See also quantitative easing (QE) Larosiere, Jacques de, 295 LCR See Liquidity Coverage Ratio (LCR) Leijonhufvud, Axel, leverage See also Supplementary Leverage Ratio (SLR) bank recapitalization and, 37, 43, 44 and banks as corporations, 47 capital requirements and, 44 liquidity and, 73–79, 87, 88f ratios, 79, 97 real estate prices and, 160 shareholder liability and, 46 Lewis, Michael, 47 liability for bank management, 46 for bank shareholders, 46 unlimited, 46–47 Libor, 89, 92f, 93, 94 licensing, 58–59 limited liability companies, 46–47 Lipscomb, Laura, 144–45 Liquidity Coverage Ratio (LCR), 80, 89 liquidity risk after Great Recession, 84f, 87f, 88f, 90f, 92f, 94f–97f, 99f arbitrage failures and, 91–98, 92f, 94f–97f Basel standards and, 79 bid-ask spreads and, 84–85 bond trading and, 84, 84f debt management policies and, 77–78 defined, 74–77 Fed liabilities and, 97, 97f financial crises and, 75 funding, 74–75, 75n2 identification problem and, 77, 77n4 interest rates and, 82–83 leverage and, 73, 79, 87, 88f market, 74 monetary policies and, 77–78 money market mutual funds and, 76–77, 80–81 money premium and, 76 money supply and, 76 normalization and, 99 quantitative easing and, 78 regulation and, 73, 78–82 repo markets and, 93–97, 95f, 96f risk appetite and, 75, 85–91, 87f, 88f, 90f, 92f “safe assets” and, 82–83 swap spreads and, 93, 94f transactions, 74 volatility and, 86–87 Volcker Rule and, 80, 83–84 “London Gold Pool,” 59 LSAPs See large-scale asset purchase programs (LSAPs) M1, 127, 127n3, 144, 148 M2, 24, 126, 126f, 127, 127n3, 128, 251 macroprudential approach, to regulation, 81–82, 161 Madison, James, 61, 191 Maria Theresa Thaler, “market monetarists,” 57–58 market “tantrums,” 73, 85, 87 Martin, Antoine, 144–45 maturity extension programs, 129–32, 131f, 142 May, Theresa, 291 MBS See mortgage-backed securities (MBS) McCallum, Bennett, 185, 194 McCallum rule, 194, 194n17 Medicaid, 22 Medicare, 22 Meltzer, Allan, 5, 40, 180, 195, 195n19, 207, 208, 219, 250 Merrill Lynch Option Volatility Estimate (MOVE) index, 86, 87f Mester, Loretta, 12 Meyer, Laurence, 214 middle class, 111 Mishkin, Frederic, 249, 250, 251, 255 MMMFs See money market mutual funds (MMMFs) monetary constitution, 35, 186–87, 190, 191 monetary decoupling, 63, 64–68 monetary disequilibrium, 149n4, 187–90, 197 monetary freedom, 198–99 monetary policy aggregate demand and, 21, 255–56 asset prices and, 189 asymmetric, 107–8 and creation of Fed, debt and, 29 Fed governance, 212f fiscal policy and, 28–29 fiscal policy vs., 21–22 guardrails for, 260–62 international coordination of, 283–89 knowledge problem and, 4–5 liquidity risk and, 77–78 normalization of, 11 politics and, reserve banks and, 12, 13 role of, 21–23 “stance” of, 246–57 subordination of, to fiscal policy, 63 systematic approach to, 221–27 wealth sharing and, 58–61 zero interest rates and, 250 money market mutual funds (MMMFs), 76–77, 80–81, 89 money premium, 76, 80 money supply See also M2 central bank balance sheet and, 56, 65, 173 components of, 55, 76 in Great Depression, 185–86, 189 inflation and, 219–20 and interest on excess reserves, 196n21 interest rates and, 252 liquidity risk and, 76 productive output linking with, 297–98 moral hazard, 38, 40, 46, 133, 133n9, 135 Morgan, J P., 47 Morgenthau, Henry, 289 mortgage-backed securities (MBS) and expanded scope of Fed, 23 Fed holdings of, 19–20, 26–27, 128–29, 129f, 229 Great Recession and, 66–67 and interest on excess reserves, 141 politics and, 229 unemployment and, 220 mortgage crisis See Great Recession mortgage equity withdrawals, 62 mortgages, 62 MOVE See Merrill Lynch Option Volatility Estimate (MOVE) index National Bank System, nationalism, 112 natural interest rate, 90f, 108n4, 109, 115–16, 117, 149, 149n4, 152–53, 168, 188, 193, 225, 238, 240, 256 See also equilibrium interest rate NAV See net asset value (NAV) negative swap spreads, 93 negativity bias, 6–7 negotiable order of withdrawal (NOW), 144 neo-Fisherian view of inflation, 91n19 net asset value (NAV), and money market mutual funds, 80–81 Net Stable Funding Ratio (NSFR), 80 Niskanen, William, 194 Nixon, Richard, 59, 191, 293 nominal GDP futures market, 255–56 nominal GDP targeting, 11, 193–94, 197n22, 198, 259–63, 262n4 normalization, 99, 100, 133–35 and adverse effects of quantitative easing, 159–61 asset prices and, 197, 200 knowledge problem and, 166–67 present challenges and, 166 priorities on path to, 165–70 NOW See negotiable order of withdrawal (NOW) NSFR See Net Stable Funding Ratio (NSFR) OAS See Option-Adjusted Spread (OAS) Occupy Wall Street, 297 Office of Thrift Supervision, 228 oil prices, 162 ON RRP See overnight reverse repurchase (ON RRP) Open Market Operations Directive, 242 Operation Twist, 25 “Optimum Quantity of Money, The” (Friedman), 139–40, 144–48, 147f, 148f Option-Adjusted Spread (OAS), 89n15 “Optiquan” (Friedman), 145 optiquan model, 145, 147–48 output gap, 149 overinvestment theories, 109n6 overnight reverse repurchase (ON RRP), viii, 78, 81, 81n7, 133–35, 164 parallel gold standard, 198 path space, 223 personal consumption expenditure (PCE) inflation index, 166, 237 Phillips Curve, 145, 168, 184, 215 policy See fiscal policy; monetary policy political instability, 110–13, 113f, 277–78 politics accountability and, and barriers to entry, 58–59 Federal Reserve and, 6–7 and Fed mandate, 220 Fed reforms and, 209 interest rates and, 7–8 mortgage-backed securities and, 229 wealth sharing and, 60–61 preemptive international monetary reform, 295–98 preferential credit allocation, 132–33, 135–36, 192 price-earnings ratio, 159–60 prices See asset prices; bond prices; equity prices; oil prices; real estate prices price stability, 167, 219–20, 220–21, 237 productivity gains, 62, 110f, 111–12 productivity norm, 193n15 quantitative easing (QE), vii, 9, 33, 67, 78, 271, 273, 275, 288 See also large-scale asset purchase programs (LSAPs); Operation Twist adverse effects of, 159–61 aggregate demand and, 159, 259 asset prices and, 160 by European Central Bank, 275 exchange rate effects and, 288 and expanded scope of Fed, 23 inflation and, 260 and interest on excess reserves, 127–28, 132–33 in Japan, 247 M2 and, 127 monetary base and, 139 and natural interest rate, 168 preferential credit allocation and, 125–26 shift to, 158–59 quantity theory of money, 146–47, 147f real bills doctrine, 181n3 real estate prices, 111–12, 160 recapitalization, of banks, 37–46, 50–51 recommoditization, of dollar, 35–37, 49, 51 Reconstruction Finance Corporation, 14n13 redistribution, political instability and, 112–13 regime uncertainty, 179, 181, 185 regulation(s) as barriers to entry, 58–59 consolidation of, 233 costs of, 48 effects of, 22–23 growth and, 15 as hampering, 15, 24 liquidity and, 74, 78–82 macroprudential approach to, 81–82, 161, 196 rolling back of, in banking, 48–51 repo markets, 76, 81, 93–97, 95f, 96f, 150–51, 150n7, 230, 232 See also overnight reverse repurchase (ON RRP); reverse repurchase agreements (RRP) Republican Party, 233 See also Tea Party movement repurchase agreement markets See repo markets responsibility theory, 191 reverse repurchase agreements (RRP), 11, 69, 231 risk appetite, liquidity and, 75, 85–91, 87f, 88f, 90f, 92f risk aversion, 73, 75, 85, 87, 88–90 Robinson, Joan, 248, 250 “Role of Monetary Policy, The” (Friedman), 145 Rosengren, Eric, 12 RRP See reverse repurchase agreements (RRP) “rule of experts,” 181 rules accountability and, 223, 224, 226, 227–28, 241 adaptation of, 226, 240, 240n3, 241 countering key arguments against, 238–40 discretion vs., 181–87, 221, 238 instrument, 246 robust, 240–42 types of, 245 rules space, 223 S&L See savings and loan (S&L) crisis “safe assets,” 82–83, 83n10, 86–89 Salomon Brothers, 47 Samuelson, Paul, 145, 243 Sarbanes-Oxley Act, 48 Saudi Arabia, 162 savings and loan (S&L) crisis, 142 savings rates, 110n8, 162 Schwartz, Anna, 114, 247 Selgin, George, 193n15, 262n4 SEP See Summary of Economic Projections (SEP) Sherman, Brad, 27–28 Shiller, Robert, 159 Shiller CAPE, 89, 89n16 SIFIs See systemically important financial institutions (SIFIs) slack, economic, 64 SLR See Supplementary Leverage Ratio (SLR) Smith, Adam, 47, 58 SNB See Swiss National Bank (SNB) Social Security, 22 Social Security Trust Fund, 20 “soft budget constraints,” 109 Solow, Robert, 145, 243 Sowell, Thomas, stabilization bias, 221 “stance,” of monetary policy, 246–57 St Louis Monetarist model, 242 stock prices, 57, 115n17, 159–60, 250 See also asset prices; equity prices stock repurchases, 41n5 Summary of Economic Projections (SEP), 99–100, 99f Summers, Larry, 34, 106, 110n8, 181–82 Sumner, Scott, 193–94 Supplementary Leverage Ratio (SLR), 79, 80, 230–31 swap spreads, negative, 93, 94f Swiss National Bank (SNB), 271, 272, 273–74, 273t systematic approach, 221–27, 239 See also rules systemically important financial institutions (SIFIs), 38, 39 “tantrums,” market, 73, 85, 87 taxes accountability and, entitlements and, 60 fiscal policy and, 29 in Greece, 59–60 growth and, 24 inflation and, 63 interest rates and, 57 politics and, on real estate, 115, 115n19 reform of, 15, 29, 30, 62, 298 reserve requirements as, 143 spending and, 24, 59–60 on Treasury bills, 151n8 Taylor, John, 5, 148, 181–82, 223, 243 Taylor rule, 11, 139, 192–93, 224–25 discretion and, 181 in Great Moderation, 182 inflation and, 66n2 as instrument rule, 246 and natural rate of interest, 240 output gap variable and, 149 unemployment and, 187, 258 when zero lower bound is binding, 152–53 when zero lower bound is not binding, 150–52 zero lower bound issue and, 148 Tea Party movement, 297 Thornton, Daniel, 211–12 time inconsistency, 184, 184n7 Todd, Walker, 13n9, 14n13 “too big to fail,” 34, 37, 39, 167 “Triffin dilemma,” 293 Trump, Donald, 233, 291, 296–98 Truth in Lending Act, 48 undercapitalization, of banks, 37 unemployment, 163, 261 in Fed mandate, 245 inability of central banks to influence, 114, 220 inflation and, 62, 145, 224–25 monetary policy and, 21 natural rate of, 21, 245, 246, 257–58 and “pedal-to-the-metal” monetary actions, 63–64 and policy process reforms, 219 quantitative easing and, 25, 158 and “soft budget constraints,” 109 Taylor rule and, 187, 258 United Kingdom government debt in, 106f growth in, 111f interest rates in, 106f investment as percent of GDP in, 111f labor productivity growth in, 110f prices in, 108f unlimited liability, 46–47 “Use of Knowledge in Society, The” (Hayek), 183 VIX See Volatility Index (VIX) Volatility Index (VIX), 86, 86n13, 87f Volcker, Paul, 215–16, 219, 269, 293 Volcker Era, Volcker Rule, 80, 83–84 Warburton, Clark, 181, 187–88, 191, 194 Warsh, Kevin, vii, 9, 217 “wealth effect,” 57, 62 wealth sharing, monetary policy and, 58–61 Wheelock, David, 211–12 White, Harry Dexter, 292 White, Lawrence, 189, 198 Wieland, Volker, 224 Wiggins, Heather, 145 Williams, Aneurin, 36 Williams, John, 243 Wilson, Woodrow, 12 Wilsonianism, 169 Woodford, Michael, 185 World Economic Forum, 291 World War I, 284 World War II, 113, 284, 292 Xi Jinping, 291 Yeager, Leland, 197–98 Yellen, Janet, 7, 9, 15n14, 25, 133–34, 160–61, 238 young people, 111–12 Zarnowitz rule, 33n1 zero-interest-rate policy (ZIRP), 57, 66n2, 105–6, 250 zero lower bound (ZLB), 140, 148–53 ... and offering fresh ideas for improving monetary policy The financial crisis highlighted the uncertainty that confronts policymakers Having failed to prevent the 2008 financial crisis and the Great... of fully winding down the Fed’s MBS holdings and reining in the scope of monetary policy Monetary Influences on Fiscal Policy The Fed’s balance sheet, low policy rate, and forward guidance aimed... “transmission mechanism” linking increases in the monetary base to changes in bank lending, overall spending, and inflation, no longer functions as it once did Under the new operating arrangements,