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During the Greenspan‐Bernanke era, the responses of Federal Reserve officials to financial crises resulted in an extraordinary involvement of the US central bank in the non‐banking financial sector. The purpose of this paper is to examine the informal and evolving conceptual framework that allows Federal Reserve officials to pursue a strategy of “constrained discretion” in responding to financial disturbances.

Behavioural economics relies on designed psychological and economic experiments to predict behavioural biases at the group level. As an analogue applicable to understanding biases in the intuitive judgments of individual policymakers, a naïve behavioural economics approach relies on intuitive or naive psychology and the interpretation of historical events as natural experiments to explain why intuitive judgments of Federal Reserve officials will contain biases.

Under the Greenspan‐Bernanke conceptual framework, Federal Reserve officials exercise “constrained discretion” in responding to disturbances arising from macro structural changes in the financial sector. The two key concepts are the Greenspan‐Bernanke doctrine on how the Federal Reserve officials respond to financial asset price bubbles and their collapses, and Bernanke's financial accelerator. Several examples are cited in which policy errors made by Alan Greenspan were attributable to identifiable biases in his intuitive judgment. In addition, Bernanke's response to the financial crisis of 2007‐2009 was based on his interpretation of the Great Depression as a natural experiment. But that interpretation was heavily biased by the influence of Milton Friedman on Bernanke's intuitive judgment. While Federal Reserve officials will need to exercise discretionary judgment in responding to financial crises, the potential for errors due to biases in that judgment can be reduced through regulatory reforms that lessen the potential for financial crises to occur.

While quantitative analyses of the effects of the Federal Reserve's actions on non‐bank financial institutions and the financial markets are ongoing, little attention has been given to the psychological aspects of the intuitive judgment that influences the discretionary decisions of the policymakers.

At what point in the tepid recovery from the global financial crisis should the Fed take a major step in normalizing U.S. monetary policy by greatly reducing its holdings of U.S. Treasury bonds? Federal Reserve Board Chairman Ben Bernanke faced this question in Spring 2012, even as he was concerned that the U.S. economy was on weaker footing than many believed. Suitable for both core and elective MBA courses in global financial markets and international finance, this case examines the risks associated with a policy some would consider monetizing the budget deficit. Students consider the factors behind the current and prospective levels of U.S. long-term interest rates from Bernanke's perspective.

On September 15, 2008, Lehman Brothers filed for bankruptcy and nearly caused a meltdown of the financial system. This article looks at the situation before Lehman went bankrupt and how this event came to trigger a financial panic during the fall of 2008 and early 2009. Two key ideas inform the analysis. The first is that what triggers financial panics are typically hidden losses. The second is that confidence plays a key role in financial panics and that confidence can be conceptualized as a belief that action can be based on proxy signs, rather than on direct information about the situation itself.

In mid-February 2009, amid the global financial crisis, the news was grim. The U.S. economy had been in recession since December 2007. If the downturn lasted into early spring, it would become America's longest postwar recession. The economy had shed 3.5 million jobs over the previous 12 months, the worst 12-month period on record. Bank lending was plummeting; the few banks with funds available were holding onto them. With this massive shift into liquid assets (cash and cash equivalents) and away from lending of any sort (even for productive uses or, in many cases, the working capital firms needed to survive), the economy would likely grind to a halt. On this brisk mid-February day in Washington, Timothy Geithner and Ben Bernanke rolled up their sleeves and reevaluated their plans to address the nearly impossible task of righting the ship. In terms of monetary and fiscal policy, were they doing all they could to halt this epic slide? Were they doing too much?

The purpose of this paper is to empirically examine the effect on US stock, bond and real estate investment trust (REIT) prices triggered by the US Federal Reserve Chairman Ben Bernanke’s announcement of a possible intent to unwind, or taper, quantitative easing (QE). In particular, the author assessed whether the effect of the “Taper Tantrum” was fundamental or financial on financial markets.

The methodology used to determine whether the effect of the “Taper Tantrum” was fundamental or purely financial is that suggested by French and Roll (1986) as extended by Tuluca et al. (2003). The analysis is based on daily data for large cap stocks, small cap stocks, long-term bonds and REITs for 18 months before Ben Bernanke’s announcement and for 18 months after the announcement.

The results show that the “Taper Tantrum” had a fundamental, rather than a financial effect on all asset classes, especially so for REITs.

The author also found that in the post-taper period following Ben Bernanke’s announcement the correlation of REITs with stocks decreased compared with pre-taper period, whereas the correlation of REITS with bonds increased substantially. In other words, the “Taper Tantrum” had a profound effect on the risk/return benefits of including REITs in the US mixed-asset portfolio.

This is the first paper to examine the effect of the “Taper Tantrum” on REITs.

The case has been used in a first-year required course called Global Economies and Markets in a module on monetary policy. On October 24, 2005, President Bush nominated Ben S. Bernanke to be chairman of the board of governors of the Federal Reserve System for a term of four years along with a 14-year term on the board of governors. With the U.S. Senate confirmation widely anticipated, Bernanke was expected to take over stewardship of the U.S. monetary policy from Chairman Alan Greenspan when he retired in January 2006. While the U.S. economy was in good shape at the end of 2005, Bernanke had to prepare to deal with two challenges when charting a course for managing U.S. monetary policy. First, the sharp rise in energy prices that began in 2002 had the potential to bring back the specter of inflation and dampen desired consumer and business spending. Second, the housing boom could turn into a housing bust, throwing the mortgage industry into turmoil and weakening consumer business confidence. There was also the possibility that the housing bust could affect broader financial markets. Bernanke had to consider his options for dealing with contingencies in the not-so-distant future.

In February 2018, Jerome Powell had taken over as chair of the FOMC. At first glance, the macroeconomic conditions inherited by Powell appeared favorable for continued stability: unemployment and inflation were low, and the economy had been steadily growing for nearly a decade. Yet despite the appearance of stability, the economy faced significant risks that required the Federal Reserve's attention. Was an uptick in inflation imminent, and if so, should Powell raise rates to limit any inflationary pressure? Or was the economy still operating below capacity, and if so, should the Federal Reserve take a more accommodative stance? To gain perspective, Powell needed to look back at the past fifty years of monetary policy in the United States.

We document how inflation expectations evolved in the United States during the fall of 1933 using narrative evidence from historical news accounts and the forecasts of contemporary business analysts. We find that inflation expectations, after rising substantially during the spring of 1933, moderated in the fall in response to mixed messages from the Roosevelt Administration. The narrative accounts and our econometric model connect the dramatic swings in output growth in 1933 – the rapid recovery in the spring and the setback in the fall – to these sudden movements in inflation expectations.

Should the central bank target asset price inflation? In their 1999 paper Bernanke and Gertler claimed that price stability and financial stability are “mutually consistent objectives” in a flexible inflation targeting regime which “dictates that central banks … should not respond to changes in asset prices.” This conclusion is straightforward within their framework in which asset price inflation shows up as a factor “augmenting” the IS curve. In this chapter, we pursue a different modeling strategy so that, in the end, asset price dynamics will be incorporated into the NK Phillips curve. We put ourselves, therefore, in the best position to obtain a significant stabilizing role for asset price targeting. It turns out, however, that inflation volatility is higher in the asset price targeting case. After all, therefore, targeting asset prices may not be a good idea.