1 / 53

Chapter 18. Conduct of Monetary Policy

Chapter 18. Conduct of Monetary Policy. Goals of monetary policy Using targets A History of monetary policy Policy Rules. I. Goals. desirable goals for the economy Fed uses monetary policy to achieve these goals directly control tools, to influence goals. High employment.

cilicia
Télécharger la présentation

Chapter 18. Conduct of Monetary Policy

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 18. Conduct of Monetary Policy • Goals of monetary policy • Using targets • A History of monetary policy • Policy Rules

  2. I. Goals • desirable goals for the economy • Fed uses monetary policy to achieve these goals • directly control tools, to influence goals

  3. High employment • i.e., low unemployment • federal government has a commitment to full employment • goal: natural rate of unemployment • about 4-5% • today: 5.1% (3/05) • 7.7% in Oswego Co.

  4. Economic Growth • annual % change in real GDP • U.S. long run average -- 3% • 2004 GDP growth 4.4%

  5. Price stability • i.e., low inflation • annual % change in CPI • primary goal of Fed since 1980s • how high is too high? • over 4% • goal: 2% or less • 2004

  6. tradeoff • between price stability & economic growth • controlling inflation can mean slowing down economic growth

  7. Financial Market Stability • stability of financial institutions • stability of interest rates • stability of exchange rates • Fed stabilized markets • October 1987 • Summer 1998 • September 2001

  8. II. Using targets • Fed directly controls tools (like OMO), not goals • it can take a year for tools to impact the goals • how to gauge progress in between?

  9. tool (OMO) operating target intermediate target Targets • related to tools and goals • used by Fed to judge if they are on track goal

  10. operating targets • respond immediately to changes in the tools • examples • bank reserves • FF rate • Tbill rate

  11. intermediate targets • affected by operating target • closely associated with goals • examples • M1, M2 or M3 • prime rate • Tnote or Tbond yields

  12. example • Fed wants 5% nominal GDP growth • intermediate target 4% M2 growth • operating target 3% MB growth • conduct open market purchases to increase MB by 3%

  13. effective targets • frequently and accurately measured • controllable by the Fed • predictably related to goals

  14. 2 types of targets • monetary targets • reserves, MB • M1, M2, or M3 • interest rate targets • FF rate • other short or medium-term rates

  15. target tradeoff • Fed can target money supply OR interest rates • NOT BOTH! • why?

  16. i MS i’’ MD’’ M M* • suppose Fed targets M* for MS:

  17. i MS i’’’ i’’ MD’’’ i’ MD’’ MD’ M M* • but as MD fluctuates, i will change:

  18. i MS i’’’ i’’ MD’’’ i’ MD’’ MD’ M M* • so if target M*, lose control of i

  19. i MS i* MD’’ M M’’ • suppose Fed targets i*

  20. i MS MS’ MS’’’ i* MD’’’ MD’’ M MD’ M’’ M’ M’’’ • but as MD fluctuates, Fed must shift MS to maintain i*

  21. i MS MS’ MS’’’ i* MD’’’ MD’’ M MD’ M’’ M’ M’’’ • Fed targets i*, lose control of M

  22. Targets • If Fed targets MS, loses control of interest rates • If Fed targets interest rates, loses control of MS

  23. III. A History of Fed Policy • Early years (1913-1929) • The Great Depression • WWII • 1950s, 60s • 1970s • 1979-82 • 1982-92 • 1992-present

  24. The Early Years • 1913-1929 • main tool: discount loans • real bill doctrine • use discount loans for production loans • result: inflation

  25. cut back on discount loans • recession/deflation 1920-21 • discovered OMO in 1920s • make up for lost revenue from discount loans by holding Treasuries

  26. The Great Depression • Fed failed to act as lender of last resort and prevent bank failures 1930-33 • why? • initial failures were small banks • Fed failed to recognize domino effect on larger banks & economy

  27. mid 1930s • recovering from GD but • Fed increases reserve requirement -- recession 1937-38

  28. 1942-51 • during WWII Fed targeted Tbill rate • kept rate low to help finance war • large MS growth -- but price controls kept inflation low • post WWII inflation • Fed abandoned Tbill rate target

  29. 1950s - 1960s • targeting “money market conditions” • short term interest rates • free reserves = excess reserves - discount loans • result: procyclical monetary policy • MS rose during expansions, fell during recessions.

  30. interest rate rise income rises MD rises ER decline DL rise FR decline Fed increases MB increase MS Why? • chain reaction: economic expansion

  31. procyclical money growth is not a good thing • rapid MS growth in expansion leads to inflation • slow MS growth in recession makes it worse

  32. MS should be countercyclical • “lean against the wind” • keep inflation under control • help prevent or end recessions

  33. 1970s • Fed announces target of money aggregates (M1, M2) • but FOMC targets both aggregates & FF rate -- cannot do both • Fed really targeting FF rate, & MS growth still procyclical

  34. Fed criticized in 1970s for failure to control inflation • energy crisis of 1973-74 did not help

  35. 1979-82 • inflation over 10% by 1979 • Paul Volcker • target nonborrowed reserves • reserves - discount loans • slow MS growth to bring down inflation • large interest rate fluctuations

  36. recession 1981-82 • “Volcker recession” • inflation below 4% by 1982 • signaled change at Fed • price stability # 1 goal • fight inflation inflation before it gets to be a problem

  37. 1982-92 • targeting “borrowed reserves” or interest rates • procyclical policy • stopped setting targets for M1, M2 • Alan Greenspan 1987 • intervened 1987 crash • slow to act for 90-91 recession

  38. exchange rate markets • $ too high • Fed, with other central banks intervened to bring $ down

  39. 1992 - present • 1990s longest expansion in U.S. history • announced FF rate target 1994 • 1994-95 “soft landing” • prevent rising inflation by increasing FF rate

  40. 1994 exchange rates • this time Fed intervened for a $ that was too low • 1998 Russian debt/ Asia crisis • lower FF rate to keep U.S. economy expanding

  41. 1999-2000 • Fed hiked FF rate to prevent inflation • 2000-2001 • Fed reversed FF rate hikes as economy slowed • 2002-present • FF rate targets have slowly risen • but not LT rates

  42. IV. Policy Rules • how to choose a target for monetary policy? • how to respond to changing economic conditions?

  43. The Taylor Rule • John Taylor • equation • FF rate target based on -- current inflation -- inflation target -- gap between actual GDP & full employment GDP

  44. LR FF rate FF rate = inflation + + .5(inflation gap) + .5(output gap) Taylor rule • Fed responds to both • price stability • business cycle

More Related