Monetary Policy: Strategy and Tactics w11

Flashcards covering key vocabulary and concepts from a lecture on monetary policy strategy and tactics.

Nominal Anchor

A nominal variable, such as the inflation rate or the money supply, which ties down the price level to achieve price stability

Other Goals of Monetary Policy

High employment and output stability, economic growth, stability of financial markets, interest-rate stability, and stability in foreign exchange markets

Hierarchical Mandates

Put the goal of price stability first, and then say that as long as it is achieved other goals can be pursued

Dual Mandates

Aimed to achieve two coequal objectives: price stability and maximum employment (output stability)

Advantages of Inflation Targeting

Does not rely on one variable, easily understood, reduces time-inconsistency, stresses transparency and accountability

Disadvantages of Inflation Targeting

Delayed signaling, too much rigidity, potential for increased output fluctuations, low economic growth during disinflation

Advantages of the Fed’s Monetary Policy Strategy

Uses many sources of information, demonstrated success

Disadvantages of the Fed’s Monetary Policy Strategy

Lack of accountability, inconsistent with democratic principles

Lessons for Monetary Policy Strategy from the Global Financial Crisis

Developments in the financial sector have a far greater impact;

Zero lower bound on interest rates can be a serious problem;

The cost of cleaning up after a financial crisis is very high;

price and output stability do not ensure financial stability

Asset-Price Bubble

Pronounced increase in asset prices that depart from fundamental values, which eventually burst

Macropudential Policy

Regulatory policy to affect what is happening in credit markets in the aggregate

Tools of Monetary Policy

Open market operation, reserve requirements, discount rate

Policy Instrument

Reserve aggregates or interest rates

Criteria for Choosing the Policy Instrument

Observability and Measurability, Controllability, Predictable effect on Goals

NAIRU

Rate of unemployment at which there is no tendency for inflation to change(non -accelerating natural rate of unemployment)

hierarchical mendates

The hierarchical mandates are guidelines central banks use that prioritise monetary policy objectives, such as putting price stability as the primary goal. As long as that is done , ther goals can be purused.

Dual mendates

Monetary policy objectives aim for maximum employment and stable prices, balancing both outcomes.

equation of natural rate of unemployement

structural unemployment - frictional unemployment.

history of inflation targeting

first annoucned in 1997

Paul volker (1979) focused on non- borrowed resources.