The NBER monetary economics program.

• Author: Romer, Christina D.
• Position: Program Report

The activities and research of the NBER's Program in Monetary Economics over the last several years have been dominated by the financial and macroeconomic crisis that began in 2007 and erupted in full force in the fall of 2008. The recession that lasted from December 2007 until June 2009 was the longest since World War II, and the collapse of GDP and employment at the end of 2008 and the start of 2009 dwarfed any declines since the demobilization at the end of that war. Moreover, the character of the downturn was very different from that of other postwar recessions. Tight monetary policy intended to slow economic activity in order to reduce inflation played no role. Instead, the recession was intimately bound up with asset price fluctuations, financial market disruptions, and the effects of private debt accumulation. And more than six years after the recession began, unemployment remains elevated in the United States, as well as in most other advanced economies.

The Monetary Economics Program is one of three programs at the NBER that focus on macroeconomics, and whose work in recent years has therefore been largely devoted to issues related to the crisis; the other two are International Finance and Macroeconomics, and Economic Fluctuations and Growth. The International Finance and Macroeconomics Program, as its name implies, focuses on international macroeconomics. The boundaries between the Economic Fluctuations and Growth and the Monetary Economics programs are less clear-cut. Research on issues concerning long-run growth is the purview of Economic Fluctuations and Growth, and most work that is specifically devoted to monetary policy is done in Monetary Economics. But the Monetary Economics Program also studies a wide range of issues that are central to macroeconomic fluctuations. Important topics include interactions between financial markets and the macroeconomy, the behavior of inflation and unemployment, fluctuations in consumption and investment, and the sources of macroeconomic fluctuations. The NBER Monetary Economics Program follows the informal definition of monetary economics as anything that monetary policymakers should be interested in.

Researchers in the NBER's Program in Monetary Economics contribute to our understanding of issues in monetary policy and macroeconomics by conducting empirical and theoretical studies of a wide range of subjects. These studies are issued as NBER Working Papers, and are presented and discussed at regular meetings of the program and at special NBER conferences devoted to particular subjects related to monetary policy. The studies are subsequently published in academic journals and in NBER volumes.

Although the greatest long-run influence of the members of the Monetary Economics Program is surely through their research, they also have a tangible, immediate influence through an entirely different channel: former members of the program often hold policymaking positions throughout the world. Former NBER Research Associate (and former Director of the Program in Monetary Economics) Ben Bernanke served as Chair of the Federal Reserve from February 2006 until January 2014, when he was succeeded by former NBER Research Associate Janet Yellen. Former program member Stanley Fischer served as Governor of the Bank of Israel from 2005 to 2013, and has recently been nominated as Vice-Chair of the Federal Reserve. Program member Mervyn King was Governor of the Bank of England from 2003 to 2013. Former program member James Stock is currently serving as a member of the Council of Economic Advisers (CEA). Program member Lawrence Summers served as Chair of the National Economic Council in 2009 and 2010. N. Gregory Mankiw resigned from his position as Director of the Monetary Economics Program in 2003 to serve as Chair of the CEA, as did Christina Romer in 2009. When she returned to the University of California, Berkeley after her public service, Romer was reappointed as an NBER Research Associate and as Co-Director of the program.

Program members also interact frequently with macroeconomic policymakers. These interactions serve to keep program members abreast of developments in policymaking, and allow policymakers to inform NBER researchers about issues that are currently important to them. Traditionally, one session of the meeting of the Monetary Economics Program at the NBER's Summer Institute is devoted to a discussion with a policymaker. However, for the past two years the program has taken this a step further by devoting an entire day to a symposium where current and former policymakers and NBER researchers discuss important policy issues. In 2012, the event, which was conducted jointly with the International Finance and Macroeconomics Program, focused on the European crises. In 2013, it focused on the 100th anniversary of the Federal Reserve. The four background papers that were prepared for the 2013 meeting (including (1, 2 and 3) were recently published in the Journal of Economic Perspectives, together with the remarks at that meeting by Federal Reserve Chair Ben Bernanke and the interview that former NBER President Martin Feldstein conducted with former Federal Reserve Chair Paul Volcker.

The work of the Monetary Economics group is so extensive and varied that discussing all of it would be almost impossible. In the remainder of this report, we therefore highlight a few areas of work that are closely related to the recent financial crisis and the subsequent weak recovery and research areas where program members have been particularly active.

Finance and Macroeconomics

Probably the biggest shift in the focus of researchers in the Monetary Economics Program in response to the crisis has been toward work on the interactions between financial markets and the macroeconomy. Before the crisis, those interactions were merely one subject out of the many that were addressed by researchers in the program. But since the crisis began, they have absorbed a large fraction of the program's attention. One indication of this greater emphasis on interactions between finance and macroeconomics is that the Monetary Economics Program now devotes a full day of its summer meeting to a joint session with researchers in finance to discuss research spanning the two fields. These events attract large audiences and great interest.

The evolution in the subject matter of the program is related to an important ongoing methodological development in monetary economics--one whose beginnings considerably predate the crisis, but that has gathered strength in recent years. Researchers are increasingly using microeconomic data to study macroeconomic questions. One obvious advantage of microeconomic data is that they allow for much larger samples: there is only so much that can be learned from a few hundred observations of quarterly macroeconomic time series data from the United States, or from several dozen macroeconomic observations from different countries. But a more important advantage of microeconomic data is that they often provide more compelling ways of untangling the difficult issues of causation that make much of economic research so challenging. In microeconomic settings, it is often possible to identify "natural experiments" where it is clear that differences among economic actors are not the result of confounding factors. And financial economics, where there...