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111. Defense Industrial Base Capabilities Study: Command Control

Publication Date:
06-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In February 2003, the Office of the Deputy Under Secretary of Defense for Industrial Policy, ODUSD(IP), produced Transforming the Defense Industrial Base: A Roadmap. This report identified the need for systematic evaluation of the ability of the defense industrial base to develop and provide functional, operational effects-based warfighting capabilities. The Defense Industrial Base Capabilities Study (DIBCS) series is a systematic assessment of critical technologies needed in the 21st century defense industrial base to meet warfighter requirements as framed by the Joint Staff's functional concepts. In addition, the DIBCS series provides the basis for strengthening the industrial base that provides solutions to warfighting needs—and from which the Joint Staff develops its Joint Integrating Concepts and Joint Operating Concepts. This report addresses the second of those functional concepts, Joint Command and Control.
Topic:
Defense Policy, Industrial Policy, and Science and Technology
Political Geography:
United States

112. Report of the Defense Science Board Task Force on Preventing and Defending Against Clandestine Nuclear Attack

Publication Date:
06-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In this report, clandestine nuclear attack means a nuclear or radiological attack By anyone for any purpose, Against the United States and/or U.S. military operations, Delivered by means other than (military) missiles or aircraft. A large subset of this threat is the smuggling of nuclear weapons, devices, or materials for use against the United States.
Topic:
Defense Policy, National Security, and Nuclear Weapons
Political Geography:
United States

113. Defense Science Board 2003 Summer Study on DoD Roles and Missions in Homeland Security

Publication Date:
05-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In the wake of the events of September 11, 2001, the role of the Department of Defense in domestic emergency preparedness and response is under scrutiny. Ever since President Carter established the Federal Emergency Management Agency (FEMA) in 1978, the Defense Department has considered its domestic emergency response role to be one of providing support or assistance to civil authority. Military planners assume that civil agencies will always lead domestic emergency preparedness and response efforts, with the Department of Defense providing resources only in response to appeals from state and local governments to the President. Local and state governments are expected to use their resources first. While National Guard capabilities may be called into play by the Governor under Title 32 status, military commanders and planners have usually assumed that other Department of Defense assets will be called into play only when local, state, and other federal resources are overwhelmed. Concerns about the Posse Comitatus Act and misunderstandings of its scope have also tended to restrict the deployment of Department of Defense assets where their use might be construed as augmenting state and local law enforcement agencies.
Topic:
Defense Policy, National Security, and Science and Technology
Political Geography:
United States

114. Is Inflation Targeting Best-Practice Monetary Policy?

Author:
Jon Faust and Dale W. Henderson
Publication Date:
05-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We describe the inflation targeting framework (ITF) and compare it against hypothetical bestpractice based on optimization. The core requirements of the ITF are an explicit long-run inflation goal and a commitment to transparency in policymaking. Advocates and practitioners of the ITF have made many contributions to clear goal setting and communication by central banks. However, we contend that ITF communication policies both as advocated and practiced often have some elements that either obfuscate or, in some cases, explicitly contradict the dictates of optimization in a stabilization-policy paradigm. In this paradigm, the central bank has an objective function that places weight on both inflation and output-gap stabilization and faces a conventional (exploitable) Phillips-curve trade-off. We point out some problems that the ITF communication policy may generate in this setting. Our analysis leads us to make four suggestions for communication policy intended to help central banks avoid these problems.
Topic:
Security, Economics, Emerging Markets, and International Trade and Finance

115. Optimal Monetary and Fiscal Policy: A Linear-Quadratic Approach

Author:
Pierpaolo Benigno and Michael Woodford
Publication Date:
04-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We propose an integrated treatment of the problems of optimal monetary and fiscal policy, for an economy in which prices are sticky (so that the supplyside effects of tax changes are more complex than in standard fiscal analyses) and the only available sources of government revenue are distorting taxes (so that the fiscal consequences of monetary policy must be considered alongside the usual stabilization objectives). Our linear-quadratic approach allows us to nest both conventional analyses of optimal monetary stabilization policy and analyses of optimal tax-smoothing as special cases of our more general framework. We show how a linear-quadratic policy problem can be derived which yields a correct linear approximation to the optimal policy rules from the point of view of the maximization of expected discounted utility in a dynamic stochastic general-equilibrium model. Finally, in addition to characterizing the optimal dynamic responses to shocks under an optimal policy, we derive policy rules through which the monetary and fiscal authorities may implement the optimal equilibrium. These take the form of optimal targeting rules, specifying an appropriate target criterion for each authority.
Topic:
Conflict Resolution, Security, Economics, and International Trade and Finance

116. Understanding the Effects of Government Spending on Consumption

Author:
Jordi Gali, J. David Lopez-Salido, and Javier Valles
Publication Date:
04-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Recent evidence on the effect of government spending shocks on consumption cannot be easily reconciled with existing optimizing business cycle models. We extend the standard New Keynesian model to allow for the presence of rule-of-thumb (non- Ricardian) consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending.
Topic:
Security, Economics, Government, and International Trade and Finance

117. The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning, and Expectations

Author:
Athanasios Orphanides and John C. Williams
Publication Date:
04-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We develop an estimated model of the U.S. economy in which agents form expectations by continually updating their beliefs regarding the behavior of the economy and monetary policy. We explore the effects of policymakers' misperceptions of the natural rate of unemployment during the late 1960s and 1970s on the formation of expectations and macroeconomic outcomes. We find that the combination of monetary policy directed at tight stabilization of unemployment near its perceived natural rate and large real-time errors in estimates of the natural rate uprooted heretofore quiescent inflation expectations and destabilized the economy. Had monetary policy reacted less aggressively to perceived unemployment gaps, inflation expectations would have remained anchored and the stagflation of the 1970s would have been avoided. Indeed, we find that less activist policies would have been more effective at stabilizing both inflation and unemployment. We argue that policymakers, learning from the experience of the 1970s, eschewed activist policies in favor of policies that concentrated on the achievement of price stability, contributing to the subsequent improvements in macroeconomic performance of the U.S. economy.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States

118. Benefits and Spillovers of Greater Competition in Europe: A Macroeconomic Assessment

Author:
Tamim Bayoumi, Douglas Laxton, and Paolo Pesenti
Publication Date:
04-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Using a general-equilibrium simulation model featuring nominal rigidities and monopolistic competition in product and labor markets, this paper estimates the macroeconomic benefits and international spillovers of an increase in competition. After calibrating the model to the euro area vs. the rest of the industrial world, the paper draws three conclusions. First, greater competition produces large effects on macroeconomic performance, as measured by standard indicators. In particular, we show that differences in competition can account for over half of the current gap in GDP per capita between the euro area and the US. Second, it may improve macroeconomic management by increasing the responsiveness of wages and prices to market conditions. Third, greater competition can generate positive spillovers to the rest of the world through its impact on the terms of trade.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
Europe

119. Monetary Discretion, Pricing Complementarity and Dynamic Multiple Equilibria

Author:
Robert G. King and Alexander L. Wolman
Publication Date:
04-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In a plain-vanilla New Keynesian model with two-period staggered price-setting, discretionary monetary policy leads to multiple equilibria. Complementarity between the pricing decisions of forward-looking firms underlies the multiplicity, which is intrinsically dynamic in nature. At each point in time, the discretionary monetary authority optimally accommodates the level of predetermined prices when setting the money supply because it is concerned solely about real activity. Hence, if other firms set a high price in the current period, an individual firm will optimally choose a high price because it knows that the monetary authority next period will accommodate with a high money supply. Under commitment, the mechanism generating complementarity is absent: the monetary authority commits not to respond to future predetermined prices. Multiple equilibria also arise in other similar contexts where (i) a policymaker cannot commit, and (ii) forward-looking agents determine a state variable to which future policy responds.
Topic:
Economics, Government, and International Trade and Finance

120. The Optimal Degree of Discretion in Monetary Policy

Author:
Susan Athey, Andrew Atkeson, and Patrick J. Kehoe
Publication Date:
04-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
How much discretion should the monetary authority have in setting its policy? This question is analyzed in an economy with an agreed-upon social welfare function that depends on the randomly fluctuating state of the economy. The monetary authority has private information about that state. In the model, well-designed rules trade off society's desire to give the monetary authority discretion to react to its private information against society's need to guard against the time inconsistency problem arising from the temptation to stimulate the economy with unexpected inflation. Although this dynamic mechanism design problem seems complex, society can implement the optimal policy simply by legislating an inflation cap that specifies the highest allowable inflation rate. The more severe the time inconsistency problem, the more tightly the cap constrains policy and the smaller is the degree of discretion. As this problem becomes sufficiently severe, the optimal degree of discretion is none.
Topic:
Civil Society, Economics, Government, and International Trade and Finance
Political Geography:
Europe