The nature and scope of the Federal Reserve's authority and the structure of its decision making are now “on the table” to an extent that has not been seen since 1935, and the Fed's vaunted independence is under some attack. This essay asks what the Federal Reserve should—and shouldn't—do, leaning heavily on the concept of economies of scope. In particular, I conclude that the central bank should monitor and regulate systemic risk because preserving financial stability is (a) closely aligned with the standard objectives of monetary policy and (b) likely to require lender of last resort powers. I also conclude that the Fed should supervise large financial institutions because that function is so closely to regulating systemic risk. However, several other functions now performed by the Fed could easily be done elsewhere.

The production smoothing model of inventory behavior has a long and venerable history and theoretical foundations that seem very strong. Yet certain overwhelming facts seem not only to defy explanation within the production smoothing framework, but actually to argue that the basic idea of production smoothing is all wrong. Most prominent among these is the fact that the variance of detrended production exceeds the variance of detrended sales. This paper first documents the stylized facts. Then it derives the production smoothing model rigorously and explains how the model can be amended to make it consistent with the facts. Finally, it reviews the theoretical and empirical evidence and tries to draw some tentative conclusions.

I. Introduction, 608. — II. Elements of a model of inheritance, 610. — III. Primogeniture, 612. — IV. The mating function, 614. — V. Random mating, 616. — VI. Class mating, 620. — VII. Assortative mating, 623. Every generation regards as natural the institutions to which it is accustomed. — R. H. Tawney

With emphasis on the adjective and the normative verb should, my answer to the question of this session is a resounding yes. Indeed, I spent a good deal of time between January 1993 and January 1996 acting on the belief that there is such a macro model; so I certainly hope it exists.' This believable falls well short of perfection, leaves many questions unanswered, and is subject to substantial stochastic errors. Nonetheless, it is both useful and extensively used in policy analysis, where contact with reality is a necessity, and you cannot beat something with nothing. It also closely resembles, but does not quite match, the way macroeconomics is taught to beginning and intermediate (but not to graduate) students. In this short presentation, I will describe briefly the main practical elements that I think we should agree on, without worrying too much about their theoretical underpinnings. Then I will turn to two critical failings of the standard macro which cry out for theoretical and empirical repair. My organizing principle is the textbook exposition that has been standard, though not universal, in teaching intermediate macroeconomics for years. The question is: how does it differ from the core model used in policy analysis?

In one of those marvelous coincidences of intellectual history, Robert Lucas was born the year after the publication of Keynes' General Theory. For the first thirty-five years of their mutual lives, the two apparently coexisted in harmony. But their relationship has been tumultuous ever since. Lucas has frequently criticized Keynesian economics as poor science; and it is precisely in that spirit that I want to address the debate today. We all know the old joke about the professor who uses the same exam questions year after year, but changes the answers. That joke encapsulates all too well what has happened to macroeconomics these last fifteen years and seems to reflect poorly on economics as a science. Or does it? On second thought, the best answers to scientific questions do change as new observations are made, as new experiments are run, and as better theories are developed. The issue is whether the answers to important questions in macroeconomics have changed for good scientific reasons or for other reasons. The joke provides the framework for my talk. I will pose eight exam questions; and for each one I will summarize the answers given by Keynes, by Lucas and his followers, and by modern Keynesians. I pick only questions that are answered differently by Keynesians and Lucasians and that are central to contemporary macroeconomic debates. The focus is on whether the Keynesian or new classical answers have greater claim to being scientific. Each student must answer every question. I. Are Expectations Rational?

Central bank credibility plays a pivotal role in much of the modern literature on monetary policy, yet it is difficult to measure or even assess objectively. A survey of central bankers was conducted to determine their attitudes on two important issues: why credibility matters, and how credibility can be built. The central bankers' answers are compared with the responses of NBER-affiliated macro and monetary economists. The two groups agree much more than they disagree. They are particularly united in their evaluations of ways to make a central bank credible -- assigning high ratings to the central bank's track record and low ratings to theoretical ideas like precommitment and incentive-compatible contracts.