guv - 11/3/98 THE GUV Monetary Policy Simulation...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
11/3/98 THE GUV Monetary Policy Simulation Educational Enhancement Program (aka video game) This program allows you to play Alan Greenspan for 14 years. You may choose either the nominal money stock M or the nominal interest rate R as your monetary policy instrument, using the up and down arrows to change your instrument by ± 1 percent/percentage point, and the left and right arrows to fine tune it by ± 0.1 percent/percentage point. You may also select (and change) a constant M growth rate. The program itself is fairly self-explanatory as to mechanics. The program starts you off in a stationary equilibrium. If you choose an M instrument and no disturbances, and do not change M, the price level P stays constant at its initial value (scaled to 100). If you change M, P will change in the same proportion eventually, but with plausible dynamics involving a little overshooting caused by induced but transitory inflationary expectations. If you select a positive growth rate of M, P will eventually grow at the same rate, but on a track a little higher than that of M because of the reduction in M demand. If you choose to add disturbances, a constant M policy will not lead to a constant P level, because the money demand function shifts unpredictably, as it seems to have done in the 1970s and 1980s. Nevertheless, inflation will stable and has no tendency to permanently diverge from money growth. If you choose R as your instrument and no disturbances and do nothing, P stays constant. However, this is an unstable equilibrium. If you tweak R even a little, even just for a short while, P will eventually either blow up or collapse unless you thereafter perpetually twiddle R. If you choose disturbances and do nothing to R, P will blow up or collapse because of the shocks to r* and/or P itself. P can be stabilized with an R instrument, but only by adept pinball-like manipulation of R to offset the inherent instability of P under an R target. A rapid inflation can always be reversed by a sufficently high R. However, once expected deflation
Background image of page 1

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

View Full DocumentRight Arrow Icon
passes (-)r*, even R = 0 is insufficiently easy to reverse the deflation, and what seems to me as a rather unrealistic meltdown occurs. Is there some simple modification of the model that prevents this? Or was Keynes right that while inflation is bad, financial markets are even less prepared to deal with deflationary expectations than inflationary expectations? After you have familiarized yourself with the program by trying the above exercises, try to see how close to 100 you can come in your scores on the following three games. Game 1:
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/17/2008 for the course ECON 520 taught by Professor Ogaki during the Fall '07 term at Ohio State.

Page1 / 7

guv - 11/3/98 THE GUV Monetary Policy Simulation...

This preview shows document pages 1 - 3. Sign up to view the full document.

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