Download Document

Chapter 25
Objectives and
Targets of
Monetary Policy
PowerPoint Presentation by Charlie Cook
Copyright © 2004 South-Western. All rights reserved.
Fundamental Issues
1. What are the ultimate goals of monetary
policy?
2. Why might a central bank use an
intermediate monetary policy target?
3. What are the pros and cons of interest rates
versus monetary aggregates as
intermediate monetary policy targets?
4. What is the policy assignment problem?
Copyright © 2004 South-Western. All rights reserved.
25–2
Internal Goals of Monetary Policy
• Inflation goals:
 Low/no inflation with limited year-to-year variability.
• Output goals:
 High and stable economic (GDP) growth.
• Employment goals:
 Stable employment growth with low unemployment.
• Legislated goals:
 Employment Act of 1946
 Humphrey-Hawkins Act of 1978
Copyright © 2004 South-Western. All rights reserved.
25–3
External Goals of Monetary Policy
• Balanced international trade:
 Domestic consumption of domestic output
 Spending of real income on imports
 Promotion of exports
 Exchange rate considerations
Copyright © 2004 South-Western. All rights reserved.
25–4
Key Term
• Mercantilism:
 The idea that a primary determinant of a nation’s
wealth is international trade and commerce, so a
nation can gain by enacting policies that spur
exports while limiting imports.
Copyright © 2004 South-Western. All rights reserved.
25–5
The Costs of Inflation and Inflation Variability
Type of Cost
Cause
Resources expended to economize on
money holdings (more trips to banks,
etc.)
Rising prices associated with inflation
Costs of changing price lists and
printing menus and catalogues
Individual product/service price
increases associated with inflation
Redistribution of real incomes from
individuals to the government
Inflation that pushes people into higher,
nonindexed nominal tax brackets
Reductions in investment, capital
accumulation, and economic growth
Inflation variability that complicates
business planning
Slowed pace of introduction of new
and better products
Volatile price changes that reduce the
efficiency of private markets
Redistribution of resources from
creditors to debtors
Unexpected inflation that reduces the
real values of debts
Table 25–1
Copyright © 2004 South-Western. All rights reserved.
25–6
Intermediate Targets of Monetary Policy
• Intermediate target:
 An economic variable that a central bank seeks to
control because it determines that doing so is
consistent with its ultimate objectives.
• The rationales for intermediate targeting:
 Difficulty in reaching agreement about the specific
effects of monetary policy.
 The limited long-term information about the
economy available to policymakers.
Copyright © 2004 South-Western. All rights reserved.
25–7
Inflation Targeting in New Zealand and Canada
SOURCES: Bank of New Zealand and Bank of Canada.
Copyright © 2004 South-Western. All rights reserved.
Figure 25–1
25–8
The Intermediate Targeting Strategy
for Monetary Policy
Figure 25–2
Copyright © 2004 South-Western. All rights reserved.
25–9
Choosing an Intermediate Target Variable
• Characteristics:
 Frequently
observable
 Consistency with
ultimate goals
 Definable and
measurable
 Controllable
Copyright © 2004 South-Western. All rights reserved.
• Potential variables:
 Monetary aggregates
 Credit aggregates
 Interest rate
 Nominal GDP
 Exchange rates
25–10
Targeting
the Nominal
Interest Rate
in the Face
of Money
Demand
Variations
Figure 25–3
Copyright © 2004 South-Western. All rights reserved.
25–11
Targeting
the Nominal
Interest Rate
in the Face of
Variations in
Autonomous
Expenditures
Figure 25–4
Copyright © 2004 South-Western. All rights reserved.
25–12
Targeting
the Quantity
of Money in
the Face of
Variations in
Autonomous
Expenditures
Figure 25–5
Copyright © 2004 South-Western. All rights reserved.
25–13
Targeting
the Quantity
of Money in
the Face of
Money
Demand
Variations
Figure 25–6
Copyright © 2004 South-Western. All rights reserved.
25–14
Interest Rates Versus Monetary
Aggregates As Intermediate Monetary
Policy Targets
• Nominal interest rate target:
 Stabilizes aggregate demand if money demand is
highly volatile while aggregate desired
expenditures are relatively stable.
• Monetary target:
 Makes aggregate demand more stable if aggregate
desired expenditures are variable while money
demand is relatively stable.
Copyright © 2004 South-Western. All rights reserved.
25–15
Exchange Rate Targeting
• Assignment problem:
 The problem of determining whether monetary or
fiscal policymakers should assume responsibility
for achieving either external-balance or internalbalance objectives.
 As a result, efforts by central banks to vary
exchange rate targets and by governments to
conduct fiscal policy can conflict, causing neither
policymaker to achieve its ultimate economic goals.
Copyright © 2004 South-Western. All rights reserved.
25–16
Monetary and Fiscal
Policy Combinations
for External Balance
Figure 25–7
Copyright © 2004 South-Western. All rights reserved.
25–17
Monetary and Fiscal
Policy Combinations
for Internal Balance
Figure 25–8
Copyright © 2004 South-Western. All rights reserved.
25–18
Policy Assignments for Internal and External Balance
Figure 25–9
Copyright © 2004 South-Western. All rights reserved.
25–19
Targeting Nominal GDP
Figure 25–10
Copyright © 2004 South-Western. All rights reserved.
25–20