NEW YORK (MNI) – The following is the seventh and final section of
Federal Reserve Vice Chair Janet Yellen’s text and footnotes prepared
Wednesday for the Money Marketeers of New York University:

[More footnotes]

9 The assumption of perfect foresight or certainty equivalence is
commonly used in practice but is not an intrinsic feature of optimal
control techniques. Indeed, the fully optimal policy under uncertainty
involves the specification of a complete set of state-contingent policy
paths.

10 In these simulations, the Federal Reserves balance sheet is
assumed to evolve in accordance with the exit strategy principles that
the FOMC adopted at its June 2011 meeting.

11 This procedure involves two steps. First, the FRB/US models
projections of real activity, inflation, and interest rates are adjusted
to replicate the baseline forecast values reported in figure 7. Second,
a search procedure is used to solve for the path of the federal funds
rate that minimizes the value of a loss function. The loss function is
equal to the cumulative sum from 2012:Q2 through 2025:Q4 of three
factors–the (discounted) squared deviation of the unemployment rate
from 5-1/2 percent, the squared deviation of overall PCE inflation from
2 percent, and the squared quarterly change in the federal funds rate.
The third term is added to damp quarter-to-quarter movements in interest
rates.

12 See the discussion in John B. Taylor and John C. Williams
(2011), Simple and Robust Rules for Monetary Policy, in Benjamin M.
Friedman and Michael Woodford, eds., Handbook of Monetary Economics,
vol. 3B, (San Diego: North Holland), pp. 829-60.

13 See John B. Taylor (1993), Discretion versus Policy Rules in
Practice, Carnegie-Rochester Conference Series on Public Policy, vol.
39 (December), pp. 195-214,
www.stanford.edu/~johntayl/Onlinepaperscombinedbyyear/1993/Discretion_versus_Policy_Rules_in_Practice.pdf
; and John B. Taylor (1999), A Historical Analysis of Monetary Policy
Rules, in John B. Taylor, ed., Monetary Policy Rules, (Chicago:
University of Chicago Press), pp. 319-341,
www.stanford.edu/~johntayl/Onlinepaperscombinedbyyear/1999/An_Historical_Analysis_of_Monetary_Policy_Rules.pdf.

14 The intercept term in each rule reflects the assumption of a
constant value of 2 percent for the equilibrium real federal funds rate.
Thus, if the economys true equilibrium real funds rate deviated
systematically from that value, the intercept term would need to be
adjusted to ensure that the inflation rate converged over time to its
longer-run goal.

15 In these simulations, the Taylor (1993) rule is defined as Rt =
2 + t + 0.5(t – 2) + 0.5Yt, while the Taylor (1999) rule is defined as
Rt = 2 + t + 0.5(t – 2) + 1.0Yt. In these expressions, R is the
federal funds rate, is the percent change in the headline PCE price
index from four quarters earlier, and Y is the output gap. The output
gap in turn is approximated using Okuns law; specifically, Yt =
2.3(5.6-Ut), where 2.3 is the estimated value of the Okuns law
coefficient and 5.6 is the assumed value of the non-accelerating
inflation rate of unemployment, or NAIRU.

16 See John B. Taylor (1999), Introduction, in John B. Taylor,
ed., Monetary Policy Rules (Chicago: University of Chicago Press), pp.
1-14,
www.stanford.edu/~johntayl/Onlinepaperscombinedbyyear/1999/Introductory_Remarks_on_Monetary_Policy_Rules.pdf.

17 See David Reifschneider and John C. Willams (2000), Three
Lessons for Monetary Policy in a Low-Inflation Era, Journal of Money,
Credit, and Banking, vol. 32 (November), pp. 936-66.

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[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]