Chapter+16+What+Should+Central+Banks+do

Chapter+16+What+Should+Central+Banks+do - Chapter 16 What...

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Chapter 16 What should Central Banks Do? - The Price Stability Goal and the Nominal Anchor - Other Goals of Monetary Policy - Should Price Stability be the Primary Goal? - Monetary Targeting - Inflation Targeting - Implicit Nominal Anchor - Tactics: Choosing the Policy Instrument - The Taylor Rule, NAIRU, and the Phillips Curve Motivation : Overly expansionary monetary policy leads to high inflation. And monetary policy that is too tight can produce serious recession in which output falls and unemployment rises. It can also lead to deflation. Hence, how should central banks conduct monetary policy? The Price Stability Goal and the Nominal Anchor From the demand side: Price stability : Low and stable inflation (is increasingly viewed as the most important goal of monetary policy) Inflation -Creates uncertainty and difficulty in planning for future -Lowers economic growth -Strains social fabric: conflict might result, because each group in the society may compete with other groups to make sure that its income keeps with the rising level of prices. The role of a nominal anchor Because price stability is so crucial to the long run health of an economy, a central element in successful monetary policy is the use of a Nominal anchor: a nominal variable such as the inflation rate or the money supply, which ties down the price level to achieve price stability. Time-inconsistency problem
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Chapter+16+What+Should+Central+Banks+do - Chapter 16 What...

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