monetary-policy

monetary-policy - Monetary Policy Sandeep Bhaskar Temple...

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Unformatted text preview: Monetary Policy Sandeep Bhaskar Temple University Sandeep Bhaskar (Temple University) Monetary Policy 1 / 23 Outline 1 Introduction 2 Implementing Monetary Policy 3 Monetary Policy Strategies 4 Extending Monetary Policy Sandeep Bhaskar (Temple University) Monetary Policy 2 / 23 Introduction Monetary Policy Monetary policy is the process by which the government, central bank, or monetary authority manages: the supply of money, the availability of money, and the cost of money or the interest rate, in order to attain macroeconomic goals including low inflation, moderate long-term interest rates, and low unemployment. Sandeep Bhaskar (Temple University) Monetary Policy 3 / 23 Introduction Types of Monetary Policy There are two major types of monetary policy: expansionary and contractionary. Expansionary Monetary Policy: Expanding money supply with an aim to lower interest rates, and drive up consumption and investment. Usually adopted when the economy is in recession. Contractionary Monetary Policy: Contracting money supply with an aim to raise interest rates, and drive down consumption and investment. Usually adopted to cool down economy in a sustained expansion. Sandeep Bhaskar (Temple University) Monetary Policy 4 / 23 Implementing Monetary Policy Two Contradictory Goals The Phillips curve shows that in the short-run there is an inverse relation between inflation and unemployment. Monetary policy involves a target of low inflation and low unemployment, and this target is not always achievable. Therefore, most central banks, tend to choose to give preference to one, and hope that the other will not become too problematic. In this case the preferred child is low inflation: most central banks target inflation either explicitly (for example, the Bank of England), or implicitly (for example, the Federal Reserve). Sandeep Bhaskar (Temple University) Monetary Policy 5 / 23 Implementing Monetary Policy Inflation and Interest Rates Most, if not all, contracts are drawn in nominal terms, that is, in money terms. They involve transactions in nominal terms, and use the nominal interest rate. Nominal interest rates are dependent on inflation rates, and keeping inflation low helps in keeping nominal interest rates low. This is perhaps the reason that makes central banks target inflation more than unemployment: lower nominal interest rates drive up investment, and hence GDP and employment....
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This note was uploaded on 05/04/2011 for the course ECON 1101 taught by Professor Rappoport during the Fall '08 term at Temple.

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monetary-policy - Monetary Policy Sandeep Bhaskar Temple...

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