Econ+102+lecture+18%2C+3-20-12+-+Practical+monetary+policy copy

Econ+102+lecture+18%2C+3-20-12+-+Practical+monetary+policy copy

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Lecture 18: Ch. 15 part 2 - “Practical” Monetary Policy Econ 102, Winter 2012 3/20/2012 1 Required reading : Ch 15: pp. 428-436
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Outline 1. “Practical” policy implementation 2. The long run neutrality of money a. Money targeting 3. Targeting policies a. Inflation rate targeting b. Output/unemployment targeting 4. Taylor Rule 3/20/2012 2
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“Practical” monetary policy Last class, we developed the theory of monetary policy: a. OMOs change bank reserves (the monetary base), which b. changes the amount of loans extended, which c. changes the money supply, which d. changes the equilibrium interest rate, which e. changes equilibrium investment , which f. changes equilibrium national output. As the homework problems will illustrate, if you know how all these equations are “tied together”, we can link changes in M to changes in rGDP 3/20/2012 3
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“Practical” monetary policy In practice, the equations for MD, I(r), AD and AS are not exactly known The theory makes it sound like you can be very precise and big and bold: “expand M by exactly $64.34 billion!” In fact, the Fed makes marginal changes, and typically they are slow. Steering a ship vs steering a bike Further, when the FOMC issues policy changes, they don’t take the form above (“M up 64.34”), but instead like so: To its traders: “keep buying T-bills until you succeed in driving down the fed funds rate by 0.25%” 3/20/2012 4
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“Practical” monetary policy That is, they don’t expand the money supply by some precise amount ( ex ante ) but say “keep expanding M until the interest rate goal is achieved” A market intervention: buy from only those who want to sell, and change the interest rate, which changes market incentives of all investors. 3/20/2012 5
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3/20/2012 6
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“Practical” monetary policy That is, they don’t expand the money supply by some precise amount ( ex ante ) but say “keep expanding M until the interest rate goal is achieved” A market intervention: buy from only those who want to sell, and change the interest rate, which changes market incentives of all investors. So: the Fed tends to change policy in a marginal, piecewise process, rather than in the big, bold steps that simple theory implies is possible. How does it determine what changes to make? 3/20/2012 7
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Central banks have four “hard” rules they tend to follow in setting monetary policy 1. money targeting 2. output targeting 3. inflation targeting 4. The Taylor Rule . Of course, they don’t always stick to just one (or necessarily follow any, at a given point in time) . These rules are options and guidelines:
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Econ+102+lecture+18%2C+3-20-12+-+Practical+monetary+policy copy

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