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CHAPTER
The Process of Monetary Policy
Formulation
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
26
A Conceptual Overview of the
Macroeconomic Policy Process
Policy Goals
•Stable Prices
Guide
Policy Actions
•Sustainable GDP Growth
•Full Employment
Alter
•Satisfactory External Balance
Alter
Spending
Saving
Borrowing
Expected Economic Performance
Lending
Alter
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
Lags in the Policy Process
Policy Lag
Recognition
Lag
A
A change in
the
economy
occurs.
Impact
Lag
Policy makers
decide what to do.
B
The change
is
recognized.
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
C
Policy makers
act.
D
Time
Maintaining an Interest Rate
Target
MS
MS'
Interest
Rate
iT
D'
D
Quantity of Money
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
Targeting Both an Interest Rate
and an Aggregate ????
MS
MS'
Interest
Rate
i'
iT
D'
D
MT
MI
Quantity of Money
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
Economic Projections for 2001
and 2002 in Percents
Board of Governors and Reserve Bank Presidents
Indicator
Range
Central Tendency
2001
Change, fourth quarter to fourth quarter1
Nominal GDP
Real GDP2
PCE prices
Average level, fourth quarter
Civilian unemployment rate
3¼ to 5
1 to 2
3½ to 4¼
1¼ to 2
2 to 2¾
2 to 2½
4¾ to 5
4¾ to 5
2002
Change, fourth quarter to fourth quarter1
Nominal GDP
Real GDP2
PCE prices
4¾ to 6
3 to 3½
1½ to 3
5 to 5½
3 to 3¼
1¾ to 2½
Average level, fourth quarter
Civilian unemployment rate
4 ¾ to 5½
4¾ to 5¼
1
Change from average for fourth quarter of previous year to average for fourth quarter of year indicated.
Chain-weighted
SOURCE: Monetary Report to the Congress (July 2001).
2
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.