Flashcards: Monetary Policy

What are examples of goals that monetary policy defines itself by?

Price stability and stable inflation.

How does monetary policy affect different economic agents?

It is inherently redistributive, affecting borrowers and lenders differently.

What are the potential failures of politicians in regards to setting monetary policy?

Politicians may be incompetent, susceptible to inflation bias, and induced volatility.

What is the Barro-Gordon model used to explain?

The government's preferences and welfare loss related to inflation and output.

What does the Phillips Curve represent?

The relationship between inflation and output, specifically expected inflation.

What happens to output when inflation expectations are correct?

When expectations are correct, output equals its natural rate.

What is the relationship between discretion and commitment in monetary policy?

Discretion allows flexibility while rules provide credibility.

What does the Taylor Rule prescribe guidelines for?

Setting interest rates based on inflation and output.

What is the main concern with government implementing monetary policy?

The time-inconsistency of initially optimal policies.

What characterizes a Conservative Central Banker?

It is more risk-averse about inflation than the government.

What is the correlation between central bank independence and inflation?

Central Bank Independence (CBI) typically results in lower inflation rates.

How is central bank independence measured?

By legal and institutional structures affecting monetary policy.

What effect has the recent financial crisis had on CBI consensus?

It weakened the consensus on Central Bank Independence.

What are political business cycles associated with?

Opportunistic and partisan behaviours of elected officials.

What indicates the existence of opportunistic political business cycles?

They manifest as pre-electoral economic booms, despite lacking systematic evidence.

What do partisan political business cycles suggest?

Macroeconomic outcomes depend on the political party in office.

How do overlapping wage contracts affect political volatility?

They cause nominal wage growth to depend on expectations of government preferences.

What is the expected outcome under left-wing regimes compared to right-wing regimes?

Higher inflation and higher output are expected more under left-wing regimes.

What is the significance of the Cukierman index?

It is used to quantify central bank independence.

What does the evidence suggest about CBI in less developed countries?

The evidence is mixed with no statistically significant relationship to inflation.

Why did CBI become widely adopted post-1970s?

There was a consensus that high inflation is detrimental to welfare.

What does the average annualized GDP growth indicate about party affiliation?

It indicates differences in economic performance based on whether a Democrat or Republican is in office.

What are the arguments against CBI?

Arguments include democratic deficit, narrow mandates, and misalignments with government policy.

What is the outcome of studies on CBI reducing political business cycles?

Studies support that CBI reduces political business cycles and output volatility.

What key parameter is analyzed to assess central bank independence's impact?

Parameters such as business cycles in regressions measure the relationship between CBI and economic volatility.

How does the concept of rational partisan political business cycles provide insights?

It provides insights into how election results can affect economic conditions through government policy actions.