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1302525929230_Chapter15_Instructor_Notes - CHAPTER 15...

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______________________________________________________________________________________ 304 CHAPTER 15: CENTRAL BANKS IN THE WORLD TODAY A. T HE B ASICS As you read chapter 15, and especially as you read it for the second time in preparation for an exam, think about the idea of a monetary policy framework. First, this framework provides the context within which policymakers convey information about monetary policy decisions and actions, not only to financial markets but to the general public. So, the monetary policy framework reflects Core Principle 3, that information provides the basis for decisions by agents. Second, the policy actions explained and then implemented in this framework represent the efforts of the policymakers to enhance the stability, ultimately, of the entire economy, and not just the financial system. So the use of the framework also reflects Core Principle 5, that stability enhances economic welfare. Notice the important interaction between these two Core Principles: With guidance about how monetary policy is conducted and implemented, agents can make decisions that allow them to better attain desirable outcomes. The policy framework is like a roadmap for what the policy authorities can and will do under various circumstances. Policy has goals, such as low, stable inflation and a high, stable rate of economic growth, just as your goal with a roadmap is to arrive at some distant city, say in time for your first job interview. Policy makers function most effectively when they are given a good amount of independence, just as you enjoy reasonable independence in choosing your route. This independence is useful, in part, in responding to unanticipated circumstances along the way, just as you might want to alter your route if you hear a traffic report on the radio about a traffic jam ahead. Policy must be accountable; if the policy goal is 2% inflation, actually achieving 2% inflation, or something close, is important. Similarly, if your interview is for two o’clock, being there at two o’clock is important. Finally, the policy framework provides for communication, in part to convey the goals to the economy, but also to discuss what will be done if the goals are not met so that others may adjust their behavior as appropriate. Analogously, if your interview is for two o’clock and you get caught in the traffic jam, you’ll be better off calling your prospective employer and explaining that an unforeseen circumstance will not allow you to arrive until three o’clock, which lets the interviewer rearrange the interview schedule rather than just sitting around waiting for you to arrive. So, the framework is a set of rules or conditions that represents the independence to make effective choices, that expresses goals and how to achieve them, that contains clear and unambiguous contingency plans if the goals become unattainable, and allows communication to those affected by the policy actions.
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