Part 16
What is Monetary Policy?
Definition: Actions by the central bank to influence interest rates, aggregate demand, economic activity, and prices.
Responsible Authority: The Reserve Bank of Australia (RBA) implements monetary policy.
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The Goal of Monetary Policy
Varies by country; in Australia, the aim is to keep consumer price inflation between 2-3%.
Low and stable inflation is believed to foster economic growth and lower unemployment long-term.
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One View of the Monetary Policy Transmission Mechanism
Central bank influences interest rates.
Changes in aggregate demand affect prices, GDP, and employment according to this mechanism.
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Effects of Monetary Policy Adjustments
Discuss effects on the economy without specific details from the slide.
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How Monetary Policy Affects Prices, Output, and Employment
Explores the link between monetary policy and economic performance metrics like prices, output, and employment rates.
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Effect of Expansionary Monetary Policy Using AD–AS Model
Explains the impact of expansionary policies on aggregate demand and supply.
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Modern Monetary Policy Implementation in Australia
RBA adopted an inflation target of 2-3% since 1996.
The RBA maintains the cash rate through open-market operations.
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Open-Market Operations
Primary tool used by the RBA to implement monetary policy involving the buying/selling of government securities.
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Alternative View of the Monetary Policy Transmission Mechanism
Monetarism: Direct relationship between money supply growth and changes in prices, GDP, and employment.
Quantitative Easing (QE): Central bank buys bonds, increasing monetary base.
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The Equation of Exchange
Identity: MV = PQ
M = Money Supply
V = Velocity of Money
P = Price Level
Q = Quantity of Output
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The Quantity Theory of Money
Converts equation of exchange into a theory under the assumption of constant V and Q, linking inflation directly to money quantity changes.
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The Quantity Theory of Money (Continued)
Modern monetarists recognize limitations of classical theory:
Velocity (V) is not constant.
Economy doesn't operate at full employment all the time.
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Monetarism and Monetary Policy Transmission Mechanism
Informs that excess money stimulates spending across various sectors, not solely in financial instruments.
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A Case Study in Monetary Targeting: Australia, 1976–85
RBA employed a form of monetary targeting with announced money supply growth projections.
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A Case Study in Monetary Targeting: Australia, 1976–85 (Continued)
Challenges faced as demand for money aggregates shifted due to financial deregulation and innovations.
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A Case Study in Monetary Targeting: Australia, 1976–85 (Continued)
Interest rates can become volatile if focused solely on controlling money supply; targeting interest rates directly is suggested as a better strategy.
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Monetary Policy Measures During the COVID-19 Crisis
RBA lowered cash rate to 0.1%.
Introduced a bond purchase program and 'term funding facility' to stimulate credit flow.
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The Role for Monetary Policy: The Rules versus Discretion Debate
Discussion on whether central banks should have discretion or adhere to established targets.
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Countercyclical Macroeconomic Policy
Aims to smooth out business cycle fluctuations; timely adjustments are crucial to effectiveness.
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Countercyclical Macroeconomic Fine-Tuning Policy
Additional insights into the nature and effectiveness of countercyclical policies.
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Countercyclical Macroeconomic Policy (Continued)
Delays in implementation due to various lags.
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Foreign Exchange Market Operations
Australia's dollar floated in 1983; exchange rate determined by supply and demand.
RBA intervenes in Forex to address volatility or speculative pressures.