s Money 2 Business Cycles Economic FluctuaTons Model

S money 2 business cycles economic fluctuatons model

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∆deposits=1/rrrx∆reserve s Money 2: Business Cycles: Economic FluctuaTons Model: Equilibrium fed. Funds. Rate increase= Decrease= b.c: expansions: contracTons: AD curve (monetary rule and spending balance) and I A line Monetary policy pre- 07/09 recession: ±urning points: Peaks: ±roughs: Determined by Nat’l Bur. Econ.Re A.D curve: shiµs leµ if FFR stays high aµer in³aTon falls Housing bubble: bankers made risky mortage loans b/c thought housing price would sTll rise & Financial deregulaTon: Greenspan allowed bank securiTes trade Volcker b4 Inadequate gov’t oversight: Dates of p/t: Monetary Rule curve shiµs up if FFR stays high aµer in³aTon falls ±radiTonal m.p. tools: Fed funds rate=rate of banks lending overnight. Fed sets interest rate or rate that banks borrow/lend to each other Pre-WWI Post- WWI: shorter contracTons, longer expansions; Romer: b/c pre- GDP esTmates didn’t include services ±aylor’s Rule: F=R*-.5 Π*+.5GAP+1.5 Π Increases FFR if YGAP increases Decrease in GAP fed buys secur. If there’s no GAP and gov b.d. increases + R.O.W con²dence decreases, FOMC increases FFR in short run and l.r. down and along monetary rule curve New policies=QuanTtaTve Easing: Goal: sTmulate spending by reducing the R* Procyclical: down recess; up w/aea Countercyclical: up during recess. R*: l.r real interest, falls with increased expected in³aTon but R rises GAP: will help with in³. If Y>Y* Π*: Π: FOMC increases interest rates Fed will sell securiTes to reduce bank reserves G/Y increase R increase by same %points ±aylor’s rule vs. actual f.f.r:
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