Monetary Policy and New Keynesian Theory

A comprehensive set of flashcards covering key vocabulary and concepts related to monetary policy and New Keynesian economic theory, ensuring thorough exam preparation.

Monetary Policy

The process by which a central bank manages the money supply to achieve specific goals such as controlling inflation, consumption, growth, and liquidity.

New Keynesian Theory

An economic theory that builds on Keynesian economics, emphasizing price stickiness and market imperfections.

Calvo Price Setting

A model of price adjustment in which firms change their prices at random intervals, leading to price rigidity.

New Keynesian Phillips Curve

An equation that describes the relationship between inflation and unemployment, accounting for expectations.

Discount Factor (β)

A number between 0 and 1 that reflects the value of future benefits relative to current benefits.

Expectations Management

A monetary policy strategy in which a central bank influences the public's expectations about future economic conditions.

Divine Coincidence

The theoretical notion that output stabilization and inflation stabilization can be achieved simultaneously.

Forward Guidance

A monetary policy tool where central banks communicate their expected future policy intentions to influence market expectations.

Quantitative Easing

A non-traditional monetary policy used by central banks to stimulate the economy by purchasing financial assets.

Inflation Targeting

A monetary policy strategy aimed at keeping inflation within a specified range to maintain economic stability.

IS-Curve

A graph that represents the relationship between interest rates and output in the goods market.

Fisher Equation

An equation that describes the relationship between nominal interest rates, real interest rates, and expected inflation.

Output Gap

The difference between the actual output of an economy and its potential output.

Backwards-Looking Model

An economic model that emphasizes past economic data and trends in forecasting future economic activity.

Path Dependency

The idea that decisions and outcomes are influenced by previous events or states in the past.

Utility Function

A mathematical representation of how a consumer derives satisfaction from consuming various goods.

Policy Rate (i)

The interest rate set by a central bank that influences other interest rates in the economy.

Expectations Error

The difference between expected and actual inflation, which affects economic behavior and decision-making.