Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Chapter 18 Conduct of Monetary Policy: Goals and Targets Goals of Monetary Policy Goals 1. High Employment 2. Economic Growth 3. Price Stability 4. Interest Rate Stability 5. Financial Market Stability 6. Foreign Exchange Market Stability Goals often in conflict © 2004 Pearson Addison-Wesley. All rights reserved 18-2 Central Bank Strategy © 2004 Pearson Addison-Wesley. All rights reserved 18-3 Money Supply Target 1. M d fluctuates between M d' and M d'' 2. With M-target at M*, i fluctuates between i' and i'' © 2004 Pearson Addison-Wesley. All rights reserved 18-4 Interest Rate Target 1. M d fluctuates between M d' and M d'' 2. To set i-target at i* Ms fluctuates between M' and M'' © 2004 Pearson Addison-Wesley. All rights reserved 18-5 The incompatibility of i and M targets • Interest-rate and monetary aggregate targets are incompatible. • A central bank can hit one or the other but not both. © 2004 Pearson Addison-Wesley. All rights reserved 18-6 Criteria for Choosing Targets Criteria for Intermediate Targets 1.Measurability Quick and accurate Monetary aggregates with two-week delay, interest-rate available immediately, and GDP less accurate and long-time delay. Is i target better? Not necessary. We care ir, but it is hard to measure because of expected π. 2.Controllability Is i target better? Not necessary. 3.Predictably Effect on Goals Interest rates aren’t clearly better than Ms on criteria 1 and 2 because hard to measure and control real interest rates © 2004 Pearson Addison-Wesley. All rights reserved 18-7 Criteria for Choosing Targets Criteria for Operating Targets Same criteria as above Reserve aggregates and interest rates about equal on criteria 1 and 2. s For 3, if intermediate target is M , then reserve aggregate is better; if the desired intermediate target is an interest rate, the preferred operating target will be federal funds rate. © 2004 Pearson Addison-Wesley. All rights reserved 18-8 Taylor Rule, NAIRU and the Phillips Curve Taylor Rule Fed funds rate target = inflation rate + equilibrium real fed funds rate + 1/2 (inflation gap) + 1/2 (output gap) Taylor has assumed that equilibrium real fed funds rates (consistent with full employment in the long run) is 2% and that an appropriate target for inflation would be also 2%, with equal weights of ½ on the inflation and output gaps. Example: π=3% , and GDP was 1% above its potential. Then Taylor rule suggests that Fed funds rate should be © 2004 Pearson Addison-Wesley. All rights reserved set at 6%. 18-9 Taylor Rule, NAIRU and the Phillips Curve Phillips Curve Theory Change in inflation influenced by output relative to potential, and other factors When unemployment rate < NAIRU, inflation rises NAIRU thought to be 6%, but inflation falls with unemployment rate below 5% Phillips curve theory highly controversial • Potential GDP is a function of the natural rate of unemployment, which is consistent with full employment • Nonaccelerating inflation rate of unemployment (NAIRU): the rate of unemployment at which there is no tendency for inflation to change. © 2004 Pearson Addison-Wesley. All rights reserved 18-10 Taylor Rule and Fed Funds Rate © 2004 Pearson Addison-Wesley. All rights reserved 18-11