Review

Darryl R. Francis was president of the Federal Reserve Bank of St. Louis from 1966 to 1976.

The rapid pace of economic growth in the 1990s was associated with an increasingly prominent role for investment, particularly for information processing and communications technologies. Given the evident pace of technological advancement in these sectors, official economic statistics have been constructed to take careful account of improvements in the quality of these high-tech capital goods.

Stock price, because it is a forward-looking variable, forecasts economic activities. An unexpected increase in stock price reflects that (i) future dividend growth is higher and/or (ii) future discount rates are lower than previously anticipated; therefore, the increase predicts higher output and investment.

James B. Bullard and Eric Schaling study a simple, small dynamic economy which a policymaker is attempting to control with a Taylor-type monetary policy rule.  The authors wish to understand the macroeconomic consequences of the policymaker’s decision to include the level of equity prices in the rule.

Monetary policy shocks derived from VARs often suggest that monetary policymakers regularly react to an unexpected increase that they induced in the federal funds rate with additional increases. This puzzling pattern can be called the “policy innovation paradox” because there is no obvious explanation for such a pattern.