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Unformatted text preview: Monetary Policy Rules and Aggregate Demand Earlier we assumed that t R was an exogenous policy variable Now consider the possibility of a policy rule The Central Bank sets t R as a function of observable variables Assume that: ) (  + = t t m r R or ) (  = t t m r R The Central Banks target inflation rate is The parameter m governs the magnitude of policy responses The policy rule attempts to offset undesired changes in inflation The AD Curve Combine IS and the Monetary Policy Rule ) ( : e Policy Rul ) ( ~ : IS  = = t t t t m r R r R b a Y Therefore: ) ( ~ : AD  = t t m b a Y Movements along AD: changes in t Y ~ and t Shifts in AD: Changes in a Changes in t Y ~ t AD The Aggregate Supply Curve Plot the Phillips Curve against not , t o Y o Y t t t t t t + + = + = =  ~ : Supply Aggregate ~ : Curve Phillips 1 1 Movements along AS: changes in t Y ~ and t Shifts in AS: Changes in 1 t Changes in o The Steady State In the steady state, the rate of inflation is constant We therefore expect that t t e t = = 1 AS therefore requires that for , = o ~ = Y t Y ~ t 1 t AS AD then requires that for , = a = t Inflation will equal the target inflation rate The Steady State: = 1 t t Y ~ t AD AS The Algebra of AD and AS o Y m b a Y t t t t t + + = = ~ ) ( ~ 1 Rearrange: o Y m b a m b Y t t t t t + = + + = + 1 ~ ~ Solve: m b m b o a m b o m b m b a Y t t t t + + + + = + = 1 1 ) ( ~ 1 1 Shortrun Equilibrium Endogenous Variables: t t Y , ~ Exogenous and Predetermined Variables: 1 , , , t a o Parameters: m b , , Effects of Disturbances An Inflation Shock A oneperiod increase in...
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This note was uploaded on 07/17/2008 for the course ECON 502.02 taught by Professor Mccafferty during the Spring '08 term at Ohio State.
 Spring '08
 McCafferty
 Monetary Policy

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