Lecture 10 Slides - Economics 134 Spring 2012 Christina...

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L ECTURE 10 The Conduct of Postwar Monetary Policy February 16, 2012 Economics 134 Christina Romer Spring 2012 David Romer
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I. O VERVIEW
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Where We Have Been: Have derived a theoretical framework for analyzing the impact of monetary policy actions. Have shown empirically that monetary policy actions affect output strongly in the short run. And that they explain a substantial fraction of postwar output fluctuations.
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Where We Are Headed: What explains monetary policy decisions? Derive a framework for describing monetary policy choices. Discuss the crucial role of ideas in determining policy actions. Come back to the influence of monetary policy actions on the behavior of output and inflation.
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II. D ESCRIBING P OLICY C HOICES U SING A M ONETARY P OLICY R ULE
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Monetary Policy Rule Description of how the nominal interest rate responds to inflation and the output gap. Can describe Fed behavior in setting interest rate policy. Or, can just describe how nominal rates vary with the other variables when Fed is targeting something else (like the money supply).
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Taylor’s Version of a Monetary Policy Rule i = π + gy + h( π π *) + r f i is the nominal interest rate π is inflation y is the deviation of output from trend π * is the Fed’s target rate of inflation r f is the equilibrium real interest rate
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Can rewrite it as something familiar: i – π = r f + gy + h( π π *) This says the Fed sets the real interest rate equal to the equilibrium real rate With an adjustment for if output is above or below trend And/or if inflation is above or below the target.
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It is the real rate that equilibrates saving and investment when output is at potential. Or equivalently, it is where the IS and MP
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This note was uploaded on 02/28/2012 for the course ECON 134 taught by Professor Davidromer during the Spring '12 term at University of California, Berkeley.

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Lecture 10 Slides - Economics 134 Spring 2012 Christina...

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