1 / 16

Monetary Policy Goals, Strategy, Tactics

Monetary Policy Goals, Strategy, Tactics. Week 10 (Chap 16). Three Tools of Monetary Policy. Open market operations Discount rate Reserve requirements. Open Market Operations. 2 Types 1. Dynamic: Meant to change MB 2. Defensive:

meghana
Download Presentation

Monetary Policy Goals, Strategy, Tactics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Monetary Policy Goals, Strategy, Tactics Week 10 (Chap 16)

  2. Three Tools of Monetary Policy • Open market operations • Discount rate • Reserve requirements

  3. Open Market Operations 2 Types 1. Dynamic: Meant to change MB 2. Defensive: Meant to offset other factors affecting MB, typically uses repos Advantages of Open Market Operations 1. Fed has complete control 2. Flexible and precise 3. Easily reversed 4. Implemented quickly

  4. Discount Rate as Ceiling on Fed Funds Rate Rightward shift of Rs to Rs2 moves equilibrium to point 2 where i2ff = id and discount lending rises from zero to DL2

  5. Discount Rate Advantages 1. Lender of Last Resort Role Disadvantages 1. Confusion interpreting discount rate changes 2. Fluctuations in discount loans cause unintended fluctuations in money supply 3. Not fully controlled by Fed

  6. Reserve Requirements Advantages 1. Powerful effect Disadvantages 1. Small changes have very large effect on Ms 2. Raising causes liquidity problems for banks 3. Frequent changes cause uncertainty for banks 4. Tax on banks

  7. Quantity Equation MV=PQ

  8. Money Growth and Inflation

  9. Goals of Monetary Policy Goals • Price Stability • Economic Growth 3. High Employment 4. Interest Rate Stability 5. Financial Market Stability 6. Foreign Exchange Market Stability Goals often in conflict

  10. Time Inconsistency Problem Rules versus discretion Solution: Fixed Rules

  11. Hierarchical Mandate “The primary objective of the European System of Central Banks [ESCB] shall be to maintain price stability. Without prejudice to the objective price stability, the ESCB shall support the general economic policies in the Community.”

  12. Dual Mandate “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long-run growth of the monetary and credit aggregates commensurate with the economy’s long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

  13. 1. M d fluctuates between M d' and M d'' 2. With M-target at M*, i fluctuates between i' and i'' Money Supply Target

  14. 1. M dfluctuates between M d' and M d'' 2. To set i-target at i* Ms fluctuates between M' and M'' Interest Rate Target

  15. Criteria for Choosing Targets 1. Measurability 2. Controllability 3. Ability to predictably affect goals Interest rates aren’t clearly better than Ms on criteria 1 and 2 because hard to measure and control real interest rates

More Related