Monetary Policy: Strategies and Tactics •Target monetary aggregates •Target inflation •“Just do it”…Whatever works In recent years, the United States has achieved excellent macro-economic performance (including low and stable inflation) until the subprime crisis occurred, without using an explicit monetary anchor. Fredric Mishkin, 9 th edition, p. 405 Milton Friedman and the Monetarists •Steady money growth an automatic stabilizer MV = PY • Discretionary policy Monetary mischief •Lags Too much too late
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Monetary Policy: Strategies and Tactics Target monetary aggregates Target inflation “Just do it”…Whatever works In recent years, the United States has.
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Monetary Policy: Strategies and Tactics
•Target monetary aggregates
•Target inflation
•“Just do it”…Whatever worksIn recent years, the United States has achieved excellent macro-economic performance (including low and stable inflation) until the subprime crisis occurred, without using an explicit monetary anchor. Fredric Mishkin, 9th edition, p. 405
Milton Friedman and the Monetarists•Steady money growth an automatic stabilizer
MV = PY
• Discretionary policy Monetary mischief
•Lags Too much too late
The Empirical Effects of an Increase in the Federal Funds Rate LagsThe Empirical Effects of an Increase in the Federal Funds Rate Lags
Monetary Aggregate TargetingUnited States (1975 – 93)• Paul Volker (1979 – 1987) focus on nonborrowed reserves– Monetarist experiment?– Smokescreen for high interest rate target?
Volcker Disinflation: 1980 - 1983
Monetary Aggregate TargetingUnited States (1975 – 93)• Paul Volker (1979) focused on nonborrowed reserves
– Monetarist experiment?– Smokescreen for high interest rate target?
• Alan Greenspan (1993) dropped monetary aggregates as a guide for conducting monetary policy
Germany (1970s - ) • Buba focused on “central bank money” in early 1970s.
• Monetary targeting can restrain inflation in long-run, even when targets are missed.– Clearly stated policy objectives expectations
Japan: (1978—”forecasts” of M2 + CDs)• 1987 M growth bubble
fix inflation expectations less inflation•Almost immediate accountability
Disadvantages
• Need strong and stable relationship between targeted monetary aggregate & goal variable
• Can you control the targeted aggregate?– Financial innovations: NOW accounts, sweeps– Reserve requirement lags: complicates NBR mgt
Target Monetary Aggregate: M1? M2? M2+CDs?
Inflation Targeting:Favored by Bernanke/Mishkin
• Public announcement of medium-term inflation target
• Price stability the primary, long-run goal of monetary policy: commitment to the inflation goal
• Many variables are used in making decisions
• Transparency of the strategy
• Accountability of the central bank
New Zealand/Canada/UK/Sweden/Finland/Australia/Spain/Israel/Chile/Brazil/Eurozone/Armenia/Colombia/Ghana/Guatamala/Indonesia/Peru/Romania/Serbia/Thailand/Uruguay/Albania/Czech Rep/Hungary/Iceland/Korea/Mexico/Norway/Philippines/Poland/South Africa/Turkey
Inflation Rates and Inflation Targets for New Zealand, Canada, and the United Kingdom, 1980–2008
Source: Ben S. Bernanke, Thomas Laubach, Frederic S. Mishkin, and Adam S. Poson, Inflation Targeting: Lessons from the International Experience (Princeton: Princeton University Press, 1999), updates from the same sources, and www.rbnz.govt .nz/statistics/econind/a3/ha3.xls.
– Easily understood– Reduce chance of time-inconsistency trap– Stresses transparency and accountability
• Disadvantages– Delayed signaling
• Target is for 2 – 3 years in future
– Too much rigidity? Inflation-nutters?• Potential for increased output fluctuations• Low economic growth during disinflationBUT…• Respond to other things in short-run