money-lecture_notes-Lec 02--The Natural Hierarchy of Money

Clearly both of these interventions are natural

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Unformatted text preview: ge rate, it could raise the interest rate in order to attract international reserves (gold). Clearly both of these interventions are natural objectives for a market maker that conceives of itself as safeguarding the monetary system. Modern central banks have larger ambitions. They are typically concerned with “managing the economy.” But their actions still have their impact only to the extent that they succeed in influencing the natural hierarchy. Modern central banks are perhaps not so much concerned with the shape of the hierarchy per se as they are with how that hierarchy articulates with the real economy, specifically aggregate demand and aggregate supply. That’s fine, but it is vital not to lose sight of the underlying mechanisms of money and credit. As you might expect, the attempt to use monetary policy for non-monetary purposes can put strain on both par and the exchange rate, and more generally on the institutions charged with maintaining quantitative equivalence between qualitatively different levels of the hierarchy. Standard analytical frameworks in macroeconomics (such as IS-LM) tend to abstract from such strains, and hence from the limits of monetary policy. In this course, we will not be abstracting from such effects, but rather bringing them up to the center of our attention....
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