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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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- Fall '14