Chapter 16

Chapter 16 - 53-35“ i k ‘u\3 g £3111 Monetary...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

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

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

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

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5

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

View Full DocumentRight Arrow Icon
Background image of page 6
Background image of page 7

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

View Full DocumentRight Arrow Icon
Background image of page 8
Background image of page 9

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

View Full DocumentRight Arrow Icon
Background image of page 10
Background image of page 11

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

View Full DocumentRight Arrow Icon
Background image of page 12
Background image of page 13
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 11/4/2010 - 53-35“ i k ‘u \3 g: £3111? Monetary Targeting I E“ ” E" 0 United States — Fed began to announce publicly targets for money supply growth in 1975. — Paul Volker (1979) focused more in nonborrowed reserves — Greenspan announced in July 1993 that the Fed would not use any monetary aggregates as a guide for conducting monetary policy Monetary Targeting II 0 Japan — In 1978 the Bank of Japan began to announce “forecasts” for M2 + CD5 — Bank of Japan’s monetary performance was much better than the Fed’s during 1978-1987. — In 1989 the Bank of Japan switched to a tighter monetary policy and was partially blamed for the “lost decade” Monetary Targeting III 0 Germany — The Bundesbank focused on “central bank money" in the early 19705. — A monetary targeting regime can restrain inflation in the longer run, even when targets are missed. — The reason of the reiative success despite missing targets relies on clearly stated monetary policy objectives and central bank engagement in communication with the public. 11/4/2010 11/4/2010 Monetary Targeting - Flexible, transparent, accountable 0 Advantages — Almost immediate signals help fix inflation expectations and produce less inflation — Almost immediate accountability o Disadvantages — Must be a strong and reliable reiationship between the goal variable and the targeted monetary aggregate -- "tau-we wag WP: mod .——‘ "3‘0 too:- ‘=.’\ Inflation Targeting I 0 Public announcement of medium-term numerical target for inflation - Institutional commitment to price stability as the primary, long-run goat of monetary policy and a commitment to achieve the inflation goal - Information—inclusive approach in which many variables are used in making decisions - Increased transparency of the strategy - Increased accountability of the centrai bank — sing} ‘u/HC‘lVr‘raO'n a gag», 5 “ " éelC-fii G9? gngECt‘fb‘ffifi Ari-m grit \fifii’fi target Qatari-fl fr. 1 A if , Err ngé ago?“ 11/4/2010 Inflation Targeting II 0 New Zealand (effective in 1990) — Inflation was brought down and remained within the target most of the time. — Growth has generally been high and unemployment has come down significantly 0 Canada (1991) ~— Inflation decreased since then, some costs in term of unemployment - United Kingdom (1992) — Inflation has been close to its target. — Growth has been strong and unemployment has been decreasing. n /- fift- i § no méfi’fiixk vac-e- r - 2« r-afiv‘a'f“. Vii-'7. ”“ f if m w“: > alt we we r?» def-Wjed Inflation Targeting III - Advantages — Does not rely on one variable to achieve target ; I — Easily understood ‘ “55 “W‘f‘gv‘fic‘ ‘3" — Reduces potential of failing in time- EOE??? inconsistency trap — Stresses transparency and accountability o Disadvantages — Delayed signaiing — Too much rigidity — Potential for increased output fluctuations — Low economic growth during disinfiation 11/4/2010 FIGURE 1 Inflation Rates and Inflation Targets for New Zealand, "Canada, and the United Kingdom, 19804008 Source: Ben S. Bernanke, Thomas Laubach, Frederic S. Mishkin, and Adam 5. Poson, Inflation Targeting: Lessons from the Intematr‘onal' Experience (Princeton: Princetnn University Press, 1999), updates from the same sources, and .nzisratistiG/aconinclja3/ha3.xls Monetary Policy with an- Implicit Nominal Anchor 0 There is no explicit nominal anchor in the form of an overriding concern for the Fed. 0 Forward looking behavior and periodic “preemptive strikes" s The goal is to prevent inflation from getting started. "mi/1% $0169 befwgfi’f‘ if7*”:G'V‘~5-irofia POESCL)‘ *‘Y 4’ J 11/4/2010 Monetary Policy with an Implicit Nominal Anchor II 0 Advantages -— Uses many sources of information — Avoids time—inconsistency problem — Demonstrated success - Disadvantages ~— Lack of transparency and accountability — Strong dependence on the preferences, skills, and trustworthiness of individuals in charge — Inconsistent with democratic principles Summary Table 1 Advantages and Disadvantages of Different Monetary Policy Strategies 11/4/2010 Tactics: Choosing the Policy Instrument 0 Tools — Open market operation - Reserve requirements 5 Ti,r}?‘,~“‘}g,fi{3 mum; 1 : r . { it - Discount rate - Policy instrument (operating instrument) — Reserve aggregates :3; ‘iqfi-‘ifiiiifififi‘fiai'kg — Interest rates _ J _ May be linked to an intermediate target bi - “'3‘ Ski mimic—i kits} 0 Interest—rate and aggregate targets are it (gm-ma Ago mm; incompatible (must chose one or the other). aging“ J 5- 3,-3/‘-,r7. C) Liter-K5; Jr's»- i __ .._*‘=,; M i FIGURE 2 Linkages Between Central Bank Tools, Poiicy Instruments, Intermediate Targets, and Goals of Monetary Poiicy Tools 0! the Policy iniemediaie Central Bank instrumeafls Targets 5”" FIGURE 3 Result of Targeting on Nonborrowed Reserves Federal Funds Rate LFg‘L‘ ‘3 .. mm ’5 I8! NR‘ Quantity of Reserves,FE \QO :vOg/{W’OE Oxffir Cg.g_7flé,/,§ 53m, W k I fig *- ch 9 £93554?” 5:)"; iw ’2‘; .n ,_ .2. \NVNOfi 9; same ‘r-zia "fireman , W h L" - ir ' “ NE??? L?iC3UY~Q, ‘54 {m @9153 K ¢ Criteria for Choosing the Policy Instrument o Observability and Measurability - Controllability - Predictabie effect on Goats Tog/1:301” 203% a I L 11/4/2010 A” id“: n \“x on f- -“"’ : 3‘1 “3:33. <2 w J fo .1 r2. . , . 1 ‘. A 1 ‘57 ‘.. ‘ a 1 Tau/nor i. {mar/*4 I. a a ‘ :_ m www-u- r a v w .5 r, , ; “a; 51 FY“- » 5 x: f X" _, _ - s 5‘21 ‘_j"-;'. 1‘ in“ I“; ,:' AL My - Egg" . i , 5 - m . "g .3 film ’3‘“ m \‘i‘x-‘-<\£‘ ‘1 @513, s r: fr The Taylor Rule, NAIRU, and the Phillips Curve (g ,- 1. i’Qii’L)‘ r 5‘1 Federal funds rate target = w inflation rate + equilibrium real fed +1/2 (inflation gap)+1/2 (output gap) iwaifiaf' ' motoai mgr; 0 An inflation gap and an output gap flew—5%": ‘- — Stabilizing real output is an important concern ‘i xi) ‘m — Output gap is an indicator of future inflation as shown by Phillips curve 0 NAIRU - Rate of unemployment at which there is no tendency for inflation to change C ._.-— 7 1 ‘ '2 1 1 ,. ' Li? urn/Vs’kitvi L fi‘z 11914-2 "i"; "if m ram 113’? x «w h I _ 1» 5“: v9.5" 1 -( ‘ 1 CW i\ ,1 . U r: :11” fi'héfif “.5: 5“" " “ire l FIGURE 4 Result of Targeting on the Federal Funds Rate Federal Funds Rate Fedora? Fonda Rate Target, if; was! are main" Quantity of Reserves, 5’ 11/4/2010 Central Bank’s Response to Asset Price Bubbles: Lessons From the Subprime Crisis 0 Asset—price bubbie: pronounced increase in asset prices that depart from fundamentai values, which eventually burst. - Types of assetnprice bubbles ‘a - Credit-driven bubbles - Subprime financial crisis - — Bubbles driven solely by gv‘xg‘igi aNlM/y‘; W: .2 1-»; "to: i—fi g;.i:_:‘,‘-45_:ij{ 'r‘ 1: , “it 133.7.“ } A "I, 1‘: f\ :‘Ij,n‘ fan—mu» 4. i}; ':'2'“</L"‘u . < , m mm i Kai-9‘: Brain-i": (“atria-'9 i in VHUV‘), 1‘ w ’ “’1‘ im if} 3:“? it“: 3’? Q»? fame 515g,” 3" l ‘ h ‘ I. " "3‘ .vnkiflnt‘. "-1 17:: ‘ ’N \\f\ {,Q\g‘tfl‘t""fi}a}i “ . \N “ \taa more its/253mg} Mia"? Central Bank's Response to AsSet Price Bubbles: Lessons From the Subprime Crisis 0 Should central banks respond to bubbles? ~ Strong argument for not responding to bubbles driven by irrational exuberance ~ Bubbles are easier to identify when asset prices and credit are increasing rapidly at the same time. — Monetary policy Should not be used to prick bubbles. a) “Dr radiation E w 3,06 .. _‘ . e “in: is »— a": \xfiavifh-a" we ~f 966M grit-era 10 11/4/2010 Central Bank's Response to Asset Price _ Bubbles: Lessons From the Subprime Crisis 0 Macropudential regulation: regulatory policy to affect what is happening in credit markets in the aggregate. 0 Central banks and other regulators should not have a iaissez-faire attitude and let credit—driven bubbles proceed without any reaction. Historical Perspective I “Mitt 0 Discount poiicy and the real bills doctrine - Discovery of open market operations a The Great Depression 0 Reserve requirements as a poiicy tooi — Thomas Amendment to the Agricultural Adjustment Act of 1933 0 War finance and the pegging of interest rates 11 Historical Perspective II o Targeting money market conditions — Procyclical monetary policy 0 Targeting monetary aggregates _ 0 New Fed operating procedures — De-emphasis of federal funds rate - De-emphasis of monetary aggregates - Borrowed reserves target - Federal funds targeting again — Greater transparency Historical Perspective III - Preemptive strikes against inflation - Preemptive strikes against economic downturns and financial disruptions — LTCM — Enron — Subprime meltdown 0 International policy coordination 11/4/2010 12 FIGURE 5 The Taylor Rule for the 7 Federal Funds Rate, 1970—2008 Federal Funds Rafe W“) Tayiar Buie 20 15 3‘} Fatima} Fufids Rate 1980 3955 19?0 $975 1938 1935 1990 1995 2900 2095 2810 Source: Federal Reserve: www.federalreserve.gov/relea5es and author's calculations. 11/4/2010 13 ...
View Full Document

This note was uploaded on 02/21/2011 for the course ECON 2035 taught by Professor Stahl during the Spring '08 term at LSU.

Page1 / 13

Chapter 16 - 53-35“ i k ‘u\3 g £3111 Monetary...

This preview shows document pages 1 - 13. Sign up to view the full document.

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