Monetary Policy & The Phillips Curve Topic 12

Flashcards on Monetary Policy & The Phillips Curve

The Phillips Curve

A short-run relationship where inflation can cause confusion, leading to temporary effects on employment and output.

Mechanics of the Phillips Curve

An increase in demand for labor leading to firms competing for workers, wages rising, and firms passing higher costs to consumers through increased prices (inflation).

Expectations Augmented Phillips Curve

The observation that increasing rates of inflation led to shifts in the short-run Phillips Curve as workers and firms increased their expectations of future inflation.

Monetary Policy

Policies/actions in the money market (money demand and money supply) aimed at achieving specific economic outcomes, primarily focusing on the short- to medium-term effects on the inflation rate.

Inflation Control

The main target of monetary control, achieved using the OCR as the instrument.

Official Cash Rate (OCR)

The instrument used by the RBNZ to control inflation by influencing the quantity of money in the economy to maintain equilibrium in the money market.

The Policy Targets Agreement

An agreement signed by the Minister of Finance and the Reserve Bank Governor to keep inflation between 1 and 3 percent over the medium term, focusing on keeping inflation near the 2 percent mid-point, and supporting maximum sustainable employment.

Before the Reserve Bank Act (1989)

Governments could use monetary policy for political gain and renege on promises, leading to uncertainty and volatile investment outcomes.

Operational Independence

The RBNZ has the agency to try and achieve the targets independently.

Monetary Policy in NZ Today

Inflation targeting to maintain a stable level of prices and supporting maximum sustainable employment.

The Bank’s Objectives (Reserve Bank of New Zealand Act 2021)

Achieving and maintaining stability in the general level of prices over the medium term; supporting maximum sustainable employment; protecting and promoting the stability of New Zealand’s financial system; and acting as New Zealand’s central bank.

Quantitative Easing (QE)

Large Scale Asset Purchases injecting money and reserves into the economy.