Chapter 16 Outline

Chapter 16 Outline - Department of Economics South Dakota...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Department of Economics South Dakota State University Chapter 16: What Should Central Banks Do? Monetary Policy Goals, Strategy, and Tactics Econ 330: Money and Banking Fall 2007 Prof. Joseph Santos This outline draws from Frederic Mishkins Money, Banking and Financial Markets (2007) and, as such, contains copy written material. Please do not quote without proper citation. Department of Economics South Dakota State University [1] Price Stability Economists define price stability as low and stable inflation. Economists increasingly view price stability as the most important goal of monetary policy. Price stability is desirable because a rising or falling price level creates uncertainty in the economy, and that uncertainty hampers economic growth. For example, when the overall level of prices is changing, the information conveyed by the prices of goods and services is harder to interpret; this complicates decision making for consumers, businesses, and government, and thereby leads to a less efficient economic system. Price instability (erratic inflation or deflation) also makes it difficult to plan for the future. Furthermore, price instability can strain a countrys social fabric. [1] Price Stability [2] Role of a Nominal Anchor [3] Time Inconsistency [4] Goals of Monetary Policy [5] The Primary Goal? [6] Hierarchical v. Dual Mandates [7] Three Policy Strategies [8] Monetary Targeting [9] Inflation Targeting, Part 1 [10] Inflation Targeting, Part 2 [11] Inflation Targeting, Part 3 [12] An Implicit Nominal Anchor This outline draws from Frederic Mishkins Money, Banking and Financial Markets (2007) and, as such, contains copy written material. Please do not quote without proper citation. Department of Economics South Dakota State University [2] The Role of a Nominal Anchor Because price stability is so crucial to the long-run health of an economy, a central element of a successful monetary policy is the use of a nominal anchor a nominal variable such as the inflation rate or the money supply that ties down, so to speak, the price level to achieve price stability. When a central bank adheres to a nominal anchor, it keeps its value vis--vis the home currency within a narrow range and, hence, promotes price stability by directly promoting low and stable inflation expectations. A more subtle reason why a nominal anchor is important is that it can limit the time-inconsistency problem (for details, see next slide), in which monetary policy conducted on a discretionary, day-by-day basis leads to poor long-run outcomes. [1] Price Stability [2] Role of a Nominal Anchor [3] Time Inconsistency [4] Goals of Monetary Policy [5] The Primary Goal?...
View Full Document

Page1 / 13

Chapter 16 Outline - Department of Economics South Dakota...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online