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Department of |
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price stability:
defined as low and stable inflation by central bankers The Role of a Nominal Anchor nominal anchor: a
nominal variable, such as the inflation rate or the money supply, which ties
down the price level to achieve price stability time-inconsistency problem: monetary policy conducted on a discretionary, day-by-day basis
leads to poor long-run outcomes The Time-Inconsistency Problem |
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High Employment natural rate of unemployment: level of unemployment consistent with full employment at which the demand for labor equals the supply of labor Economic Growth Stability of Financial Markets Interest-Rate Stability Stability
in Foreign Exchange Markets |
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Hierarchical Versus Dual Mandates hierarchical mandates: mandates which put the goal of price stability first, and then say
that as long as it is achieved other goals can be pursued dual mandate:
mandate to achieve two co-equal objectives (price stability and maximum
employment) Price Stability as the Primary, Long-Run Goal of
Monetary Policy |
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Monetary Targeting in the Advantages of Monetary Targeting Disadvantages of Monetary Targeting |
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Inflation
Targeting in See Figure 1 Advantages
of Inflation Targeting Disadvantages
of Inflation Targeting Delayed
Signaling Too
Much Rigidity Potential
for Increased Output Fluctuations Low
Economic Growth |
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Advantages of the Fed’s Approach Disadvantages of the Fed’s Approach |
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policy instrument: a variable that responds to the central bank’s tools and indicates the stance (easy or tight) of monetary policy intermediate target: stand between the policy instrument and the goals of monetary policy See Figure 2 See Figure 3 Criteria
for Choosing the Policy Instrument Observability and Measurability Controllability Predictable
Effect on Goals |
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Taylor rule: indicates that the federal (fed) funds rate should be set equal to the inflation rate plus an “equilibrium” real fed funds rate (the real fed funds rate that is consistent with full employment in the long run) plus a weighted average of two gaps: (1) an inflation gap, current inflation minus a target rate, and (2) an output gap, the percentage deviation of real GDP from an estimate of its potential full employment level Federal fund rate target = inflation rate + equilibrium real fed funds rate + (1/2)(inflation gap) + (1/2)(output gap) Phillips curve theory: indicates that changes in inflation are influenced by the state of the economy relative to its productive capacity, as well as other factors NAIRU (nonaccelerating inflation rate of unemployment): rate of unemployment at which there is no tendency for inflation to change See Figure 4 |
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Disclaimer: pages.slu.edu is a service of Saint Louis University, Saint Louis University does not control, monitor or guarantee the information contained in these sites. For more information » |