M08_MISH1438_06_IM_C08

M08_MISH1438_06_IM_C08 - Chapter 8 Conduct of Monetary...

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Chapter 8 Conduct of Monetary Policy: Tools, Goals, Strategy and Tactics The Federal Reserve’s Balance Sheet Liabilities Assets Open Market Operations Discount Lending The Market for Reserves and the Federal Funds Rate Supply and Demand in the Market for Reserves How Changes in the Tools of Monetary Policy Affect the Federal Funds Rate Tools of Monetary Policy Open Market Operations A Day at the Trading Desk Discount Policy Operations of the Discount Window Lender of Last Resort Inside the Fed Box: Discounting to Prevent a Financial Panic: The Black Monday Stock Market Crash of 1987 Reserve Requirements Monetary Tools of the European Central Bank Open Market Operations Lending to Banks Reserve Requirements The Price Stability Goal and the Nominal Anchor The Role of a Nominal Anchor The Time-Inconsistency Problem Other Goals of Monetary Policy High Employment Economic Growth Interest-Rate Stability Stability in Financial Markets Stability in Foreign Exchange Markets Should Price Stabilty Be the Primary Goal of Monetary Policy? Hierarchical Versus Dual Mandates
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38 Mishkin/Eakins • Financial Markets and Institutions, Sixth Edition Price Stability as the Primary, Long-Run Goal of Monetary Policy
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Chapter 8 Conduct of Monetary Policy: Tools, Goals, Strategy and Tactics 39 Monetary Targeting Monetary Targeting in the United States, Japan and Germany Global Box: The European Central Bank’s Monetary Policy Strategy Advantages of Monetary Targeting Disadvantages of Monetary Targeting Inflation Targeting Inflation Targeting in New Zealand, Canada and the United Kingdom Advantages of Inflation Targeting Disadvantages of Inflation Targeting Inside the Fed Box: The New Chairman and Inflation Targeting Tactics: Choosing the Policy Instrument Criteria for Choosing the Policy Instrument The Practicing Manager: Using a Fed Watcher Overview and Teaching Tips Chapter 8 outlines the tools, goals, strategy and tactics of central bank policymaking. The chapter starts by looking at the Fed balance sheet and then by analyzing the market for reserves, shows how monetary policy affects the federal funds rate. It then analyzes how the Fed uses its tools in theory and in practice. and then looks at two basic strategies for monetary policy: monetary targeting and inflation targeting. The next part of the chapter starts by laying out modern theories of central banking: it first discusses the price stability goal and the role of a nominal anchor in solving the time-inconsistency problem; and then discusses the other goals of monetary policy and why price stability is now viewed as the primary goal of monetary policy. The time-inconsistency problem is one of the most important ideas in monetary theory in the last twenty years. I illustrate the time-inconsitency problem by using the example of how many people cannot stick to a diet even though they know this is the right thing for them to do in the long run. Many other examples can bring this idea home to the student. Another good example is the fact that it is optimal not to give in to
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This note was uploaded on 10/17/2011 for the course ECON 317 taught by Professor Guidry during the Spring '11 term at Nicholls State.

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M08_MISH1438_06_IM_C08 - Chapter 8 Conduct of Monetary...

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