WASHINGTON, D.C. - Today Joint Economic Committee (JEC) Chairman Jim Saxton released Federal Reserve Chairman Alan Greenspan's answers to questions submitted in connection with a recent JEC hearing at which Chairman Greenspan testified. Saxton submitted additional written questions on the difficulties identifying the neutral interest rate for monetary policy; the low level of long-term interest rates; the usefulness and interpretation of the yield curve; and the value of transparency in Federal Reserve policy.

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WASHINGTON, D.C. - The inflation targeting policy used by many central banks around the world maintains low inflation, increases financial market stability, and reduces risk, all factors that tend to lower interest rates, according to a new study released today by Chairman Jim Saxton of the Joint Economic Committee (JEC). The new JEC study, Economic Effects of Inflation Targeting, examines the empirical evidence on the impact of inflation targeting as it has been implemented in a number of countries. Inflation targets typically define a range of acceptable increases in a broad inflation measure such as a core price index.

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Congressional interest in price stability legislation goes back many decades to the early years of the Federal Reserve, according to a new study released today by Vice Chairman Jim Saxton. The study, Price Stability and Inflation Targets: A Legislative History, examines the history of Congressional efforts to mandate price stability in monetary policy, culminating in the development of the first inflation targeting legislation, which was introduced by Saxton in 1997.

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Federal Reserve monetary policy remains a potent force even when short-term interest rates are very low, according to a Joint Economic Committee (JEC) study released today by Vice Chairman Jim Saxton. The study, Monetary Policy in Low Inflation/Deflation Environments, examines the options available to the Federal Reserve to ease monetary policy even when the short-term Federal Funds rate is barely positive.

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Central banks should maintain their focus on price stability and generally not attempt to influence asset prices, according to a new study released today by Joint Economic Committee (JEC) Vice Chairman Jim Saxton. The new JEC study, Monetary Policy and Asset Prices, examines the arguments for and against monetary intervention to influence sharp asset price movements, including stock market "bubbles."

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Recently, growing support has emerged endorsing the concept of price stability as the principal policy objective for Federal Reserve monetary policy. After outlining current monetary institutional arrangements and related congressional responsibilities, this paper details the reasons for and benefits from stabilizing the purchasing power of money. This objective has been endorsed not only by many of the world’s most esteemed monetary economists but also by many Federal Reserve officials. Evidence demonstrates that price stability in the form of inflation targets can work quite well. Under such an approach, the central bank would set upper and lower bounds of inflation target ranges defined as percentage increases in a broad price index. Furthermore, the approach allows for ample monetary policy flexibility and there are several reasons why now is an opportune time to adopt this approach. Finally, certain market price indicators appear to be especially well-suited to serve as policy guides in such a price stabilizing monetary policy strategy.

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Price stability is currently a central focus of U.S. monetary policy. Because of well-known policy lags and the need for preemptive policy action, the Federal Reserve necessarily uses intermediate indictors to help attain its inflation goals. Currently, there is disagreement among economists as well as Federal Reserve policy makers as to the proper set of intermediate indictors to use in conducting a price stabilizing monetary policy.

    

Some analysts, for example, use models that typically embody a “Phillips curve” relationship relating inflation positively to an “output gap,” typically using the gap between actual unemployment and NAIRU or the gap between actual GDP and potential GDP as inflation guides. In recent years, however, these models have not performed well; their inflation forecasts have persistently been higher than actual inflation. There are a number of problems associated with the use of NAIRU or potential GDP as policy guides in a price stabilizing monetary policy strategy. These problems, together with the recent poor inflation forecasting record of these variables, suggest that alternative policy guides should be considered.

Market price indicators are such an alternative useful set of guides to a price stabilizing monetary policy. These indicators -- commodity price indices, the foreign exchange value of the dollar, and long-term bond yields -- have a number of advantages as policy guides, especially when they are jointly assessed in conjunction with one another. Recently, these indicators consistently provided reliable signals as to the direction of and to future movements in core general prices. The inflation signals of these indicators were consistent with the actual benign core inflation that characterized the period. In this sense, these indicators provided more reliable inflationary signals than the above-described “gap” models that consistently predicted higher than actual inflation.

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Federal Reserve monetary policy has traditionally focused on the domestic economy. Over time, however, a number of significant trends have underscored the potential importance of the international dimensions of contemporary monetary policy. Such trends include the following:

• Financial markets continue to become increasingly integrated internationally; capital is evermore mobile.
• The U.S. dollar continues to remain the world’s principal international currency despite evolving exchange rate arrangements.
• Official and unofficial dollarization has continued in several emerging market economies

These trends suggest that monetary policy may have differing transmission mechanisms increasingly involving international variables than was earlier the case. In addition to these trends, empirical evidence recently has accumulated showing that changes in U.S. monetary policy can significantly impact emerging market economies in a number of ways. For example, changes in U.S. monetary policy can (1) dominate capital flows in emerging market economies, (2) be associated with financial crises in these countries, and (3) significantly impact interest rates and financial markets in emerging economies under differing exchange rate arrangements. Furthermore, experience shows that the Federal Reserve can successfully assume international lender-of-last-resort responsibilities and stabilize world financial markets in situations of international liquidity crises.

 The Federal Reserve should increasingly recognize these international considerations when conducting monetary policy.

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The case for a more transparent U.S. dollar policy is compelling. In addition to producing a number of economic benefits, a more transparent policy would complement a growing consensus on the desirability of transparency in the conduct of government policy in general and monetary policy in particular. More open disclosure in dollar policy is long overdue for a number of important reasons. Further, improved transparency would parallel Treasury's requirement to comply with the letter and spirit of the Government Performance and Results Act, which mandates a clarification of objectives and clear explanation of operations.

Transparency has multiple dimensions, involving not only the clarification of dollar policy objectives, but also the timely and complete disclosure of policy decisions and their underlying rationale.

Current dollar policy violates conventional transparency guidelines or parameters in a number of ways. Policy objectives are unclear, intervention policy is non-transparent from several perspectives, Treasury and Federal Reserve dollar relations are ambiguous, and Exchange Stabilization Fund (ESF) financing methods are obscure. Further, the ESF is overly secretive and current informational reporting is not nearly as transparent as it could be.    

A number of specific recommendations for improving dollar policy transparency include the following: Establish clear, understandable dollar policy objectives that are consistent with monetary policy goals.

• Promote clear, understandable procedures for intervention activity.
• Require more transparent dollar policy reporting from institutions charged with foreign exchange management responsibilities.
• Clarify dollar policy responsibilities of Treasury vis-à-vis the Federal Reserve.
• Insist on a more transparent and reformed ESF.
• Establish rigorous oversight procedures for these reforms.

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Congress has constitutional authority for regulating the domestic and external value of money. This paper describes how that authority was first implemented and later delegated to the Federal Reserve and U.S. Treasury earlier this century.

Since that time, however, the economic landscape has changed dramatically. The international monetary system has been transformed and capital mobility has substantially increased. No reliable, credible standard has anchored the price system and replaced the once reliable commodity standards of earlier periods. Dollar policy remains ill-defined and overly secretive. These new circumstances make the earlier, fragmented delegation of monetary power contradictory and inconsistent.

These inconsistencies need to be recognized and corrected. Congress should consider reorganizing monetary responsibilities to provide a more consistent, transparent, and credible overall monetary authority. Congress could reassert its constitutional authority and:

• Re-establish a reliable, credible anchor to the price system by mandating inflation targets for Federal Reserve monetary policy.
• Insist on a clarification of dollar policy; define what does and what does not constitute appropriate dollar policy. Delineate proper roles for both the Federal Reserve and Treasury Department.
• Insist on a more transparent dollar policy from those institutions charged with foreign exchange management responsibilities.
• Establish rigorous procedures and exacting criteria for congressional oversight of dollar policy.

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Today's changing financial environment requires more transparent Federal Reserve monetary policy. Such transparency would help to establish understandable rules and procedures, to eliminate unnecessary market uncertainties and volatility, and to minimize the costs of anti-inflation monetary policy.

Transparent monetary policy is characterized by openness and a lack of secrecy and ambiguity. Transparency is multi-dimensional and includes the clarification of policy goals, of policy procedures, and the timeliness in reporting policy decisions.

More transparent monetary policy has a number of advantages. It can work to (1) clarify policy objectives, (2) improve the workings of financial markets, (3) enhance central bank credibility, (4) reduce the chances of monetary policies manipulation for political purposes, (5) foster better monetary policymaking, and (6) complement congressional monetary policy oversight responsibilities.

Recently, many central banks have recognized these advantages and have moved toward making their monetary policies more transparent. The Federal Reserve has made some progress on this front but generally has lagged behind some other central banks. The Federal Reserve could move toward a more transparent policy by:

• Adopting explicit inflation targets
• Reporting more frequently to the Congress
• Releasing information earlier
• Providing more information to the public

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A number of criticisms have been directed at the strategy of mandating price stability as the primary goal for monetary policy. These criticisms have been addressed in this paper and shown not to withstand scrutiny. Price stability remains a viable policy goal. In particular:

• Price stabilizing monetary policy not only retains a good deal of flexibility so that other policy goals are achievable, but this policy itself works to stabilize economic activity.
• Inflation is not necessary to foster labor market adjustment and may work to remove existing wage flexibility. Price stability, on the other hand, likely would work to promote such flexibility.
• An environment of price stability and low interest rates does not constrain monetary policy; central banks can pursue stimulative policy via a variety of channels under stable prices. Price stability, however, does minimize the need for such stimulative policy.
• The CPI remains a viable price index measure suitable for use as an inflation target. Despite some measurement bias, the CPI has many advantages which outweigh its disadvantages.
• The best research suggests that the benefits of price stability far outweigh its costs; price stability is well worth its price. This research indicates that inflation's costs are high, even at low levels of inflation.

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Although inflation has receded, and hence price stability is no longer a "headline-grabbing" issue, the paper highlights several important reasons why now is the opportune time to adopt such a strategy. The U.S. legislative history of this approach is summarized and essentials of current price stability legislation presented.

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This paper provides a brief overview of what Members of Congress should know about the Federal Reserve. It is intended to lay the groundwork for several forthcoming papers involving issues related to congressional oversight of Federal Reserve monetary policy and the goal of price stability.

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This paper focuses on how a reduction in annual Consumer Price Index (CPI) adjustments would affect the Federal income tax. A previous Joint Economic Committee (JEC) report found that income tax increases, falling primarily on middle class taxpayers, would comprise about 40 percent of the direct budget effects of a CPI revision. This paper takes no position on policy issues related to adjusting the CPI.

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This report reviews how a number of central banks around the world have successfully implemented inflation targets to guide monetary policy. The study also lends support to the Federal Reserve's current emphasis under Chairman Alan Greenspan on price stability and low inflation.

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This is a brief paper on the findings of the Boskin Commission. The Boskin Commission issued a report on the Consumer Price Index (CPI) entitled Toward a More Accurate Measure of the Cost of Living, which suggests that the current CPI may overstate inflation by 0.8 to 1.6 percentage points annually. The Commission concluded that the most reasonable point estimate of this overstatement is 1.1 percentage points per year.

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