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LectureNote14 - LECTURE FOURTEEN Goals Strategy and...

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Unformatted text preview: LECTURE FOURTEEN Goals, Strategy, and Instruments of Monetary Policy ECONOMICS 209 Professor Kevin Huang Vanderbilt University 16-1 Monetary Policy Goals and Strategy • Goals—low and stable inflation is the most important goal of monetary policy • High and volatile inflation creates uncertainty and difficulty in planning for future and lowers economic growth • Deflation can induce financial instability and trigger financial crises • Strategy—using a nominal anchor such as the money supply or inflation rate to tie down the price level to achieve price stability 16-2 Other Goals of Monetary Policy • High employment ¡ Natural rate of unemployment ¡ Nonaccelerating inflation rate of unemployment • Economic growth • Stability of financial markets • Interest-rate stability • Foreign exchange market stability 16-3 Should Price Stability Be the Primary Goal? • In the long run there is no conflict between the multiple goals • In the short run there is often a tradeoff between the price stability goal and the high employment and interest-rate stability goals • Hierarchical mandate ¡ Bank of England, Bank of Canada, RBNZ, ECB • Dual mandate ¡ The U.S. Federal Reserve 16-4 Monetary Targeting as a Policy Strategy • Popular in 1970s-80s, but unsuccessful in most...
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LectureNote14 - LECTURE FOURTEEN Goals Strategy and...

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