Beruflich Dokumente
Kultur Dokumente
The Conduct of
Monetary Policy:
Strategy and
Tactics
20-2
17-2 2016 Pearson Education Ltd. All rights reserved.
Learning Objectives
Define and recognize the importance of a
nominal anchor.
Identify the six potential goals that
monetary policymakers may pursue.
Summarize the distinctions between
hierarchical and dual mandates.
Compare and contrast the advantages and
disadvantages of inflation targeting.
Identify the key changes made over time to
the Federal Reserve monetary policy
strategy.
20-3
17-3 2016 Pearson Education Ltd. All rights reserved.
Learning Objectives
List the four lessons learned from the global
financial crisis and discuss what they mean
to inflation targeting.
Summarize the arguments for and against
central bank policy response to asset-price
bubbles.
Describe and assess the four criteria for
choosing a policy instrument.
Interpret and assess the performance of the
Taylor rule as a hypothetical policy
instrument for setting the federal funds rate.
20-4
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The Price Stability Goal and the
Nominal Anchor
20-5
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Other Goals of Monetary Policy
20-6
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Should Price Stability Be the
Primary Goal of Monetary Policy?
20-7
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Inflation Targeting
20-8
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Inflation Targeting
New Zealand (effective in 1990)
Inflation was brought down and remained within the
target most of the time.
Growth has generally been high and unemployment
has come down significantly.
Canada (1991)
Inflation decreased since 1991; some costs in term
of unemployment
United Kingdom (1992)
Inflation has been close to its target.
Growth has been strong and unemployment has
been decreasing.
20-9
17-9 2016 Pearson Education Ltd. All rights reserved.
Figure 1
Inflation Rates
and Inflation
Targets for
New Zealand,
Canada, and
the United
Kingdom,
19802014
20-10
17-10 2016 Pearson Education Ltd. All rights reserved.
Inflation Targeting
Advantages:
Does not rely on one variable to achieve target
Easily understood
Reduces potential of falling in time-
inconsistency trap
Stresses transparency and accountability
Disadvantages:
Delayed signaling
Too much rigidity
Potential for increased output fluctuations
Low economic growth during disinflation
20-11
17-11 2016 Pearson Education Ltd. All rights reserved.
The Evolution of the Federal Reserves
Monetary Policy Strategy
20-12
17-12 2016 Pearson Education Ltd. All rights reserved.
The Evolution of the Federal Reserves
Monetary Policy Strategy
20-13
17-13 2016 Pearson Education Ltd. All rights reserved.
The Evolution of the Federal Reserves
Monetary Policy Strategy
Advantages
Uses many sources of information
Demonstrated success
Disadvantages
Lack of accountability
Inconsistent with democratic principles
20-14
17-14 2016 Pearson Education Ltd. All rights reserved.
The Feds Just Do It Monetary
Policy Strategy
20-15
17-15 2016 Pearson Education Ltd. All rights reserved.
Lessons for Monetary Policy Strategy
from the Global Financial Crisis
1. Developments in the financial sector have a far
greater impact on economic activity than was
earlier realized.
20-16
17-16 2016 Pearson Education Ltd. All rights reserved.
Lessons for Monetary Policy Strategy
from the Global Financial Crisis
20-17
17-17 2016 Pearson Education Ltd. All rights reserved.
Should central banks respond to
bubbles?
20-18
17-18 2016 Pearson Education Ltd. All rights reserved.
Should central banks respond to
bubbles?
20-19
17-19 2016 Pearson Education Ltd. All rights reserved.
Tactics: Choosing the Policy
Instrument
Tools
Open market operation
Reserve requirements
Discount rate
Policy instrument (operating instrument)
Reserve aggregates
Interest rates
May be linked to an intermediate target
Interest-rate and aggregate targets are
incompatible (must chose one or the
other).
20-20
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Figure 2 Linkages Between Central Bank Tools,
Policy Instruments, Intermediate Targets, and
Goals of Monetary Policy
20-21
17-21 2016 Pearson Education Ltd. All rights reserved.
Figure 3 Result of Targeting on
Nonborrowed Reserves
Federal
Funds Rate
id Rs
ior Rd*
Rd
NBR* Quantity of
Reserves, R
20-22
17-22 2016 Pearson Education Ltd. All rights reserved.
Figure 4 Result of Targeting on the
Federal Funds Rate
Federal
Funds Rate
id
Rs Step 1. A rightward or leftward
shift in the demand curve for
reserves
20-23
17-23 2016 Pearson Education Ltd. All rights reserved.
Criteria for Choosing the Policy
Instrument
20-24
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Tactics: The Taylor Rule
20-25
17-25 2016 Pearson Education Ltd. All rights reserved.
Figure 5 The Taylor Rule for the
Federal Funds Rate, 19702014
20-26
17-26 2016 Pearson Education Ltd. All rights reserved.