Monetary Economics.

The NBER's Program on Monetary Economics, directed by Ben S. Bernanke of Princeton University, met in Cambridge on April 27. The following papers were discussed:

George W. Evans, University of Oregon, and Seppo Honkapohja, University of Helsinki, "Expectations and the Stability Problem for Optimal Monetary Policies"

Discussant: Bennett McCallum, NBER and Carnegie-Mellon University

Eric T. Swanson, Federal Reserve Board, "Optimal Nonlinear Policy: Signal Extraction with a Non-Normal Prior"

Discussant: Noah Williams, University of Chicago

Susan Athey, NBER and MIT;

Andrew Atkeson, NBER and University of California, Los Angeles; and Patrick J. Kehoe, NBER and University of Minnesota, "On the Optimality of Transparent Monetary Policy"

Discussant: Jon Faust, Federal Reserve Board

Robert J. Barro, NBER and Harvard University, and Sivana Tenreyro, Harvard University, "Closed and Open Economy Models of Business Cycles with Marked Up and Sticky Prices" (NBER Working Paper No. 8043)

Discussant: Mark Bils, NBER and University of Rochester

Christopher Otrok, University of Virginia; B. Ravikumar, Pennsylvania State University; and Charles H. Whiteman, University of Iowa, "Habit Formation: A Resolution of the Equity Premium Puzzle?"

Discussant: John C. Heaton, NBER and University of Chicago

Susanto Basu and Miles S. Kimball, NBER and University of Michigan, "Long-Run Labor Supply and the Elasticity of the Intertemporal Substitution for Consumption"

Discussant: Robert E. Hall, NBER and Stanford University

A fundamentals-based monetary policy rule, which would be optimal without commitment when private agents have perfectly rational expectations, is unstable if these agents in fact follow standard adaptive learning rules. This problem can be overcome if private expectations are observed and suitably incorporated into the policymaker's optimal rule. These strong results extend to the case in which there is simultaneous learning by the policymaker and the private agents. Evans and Honkapohja show the importance of conditioning policy appropriately, not just on fundamentals, but also directly on observed household and firm expectations.

Swanson offers a possible theoretical explanation for the Federal Reserve's relatively laissez-faire attitude toward historically low unemployment in the late 1990s. In models of optimal monetary policy under uncertainty, assumptions must be made about the structure of the economy and policymakers' beliefs about unobserved and...