Summary
Summary Economics 244 summaries
- Course
- Economics 244
- Institution
- Stellenbosch University (SUN)
chapter 17 of economics 244 neatly and well summarised
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Chapter 17The conduct of Monetary Policy: Strategy and Tactics
The Price Stability Goal and the Nominal Anchor
• Over the past few decades, policy makers throughout the world have become
increasingly aware of the social and economic costs of inflation and more
concerned with maintaining a stable price level as a goal of economic policy.
• The role of a nominal anchor: a nominal variable, such as the inflation rate or
the money supply, which ties down the price level to achieve price stability
• The time-inconsistency problem
Other Goals of Monetary Policy
• Five other goals are continually mentioned by central bank officials when they
discuss the objectives of monetary policy:
1. High employment and output stability
2. Economic growth
3. Stability of financial markets
4. Interest-rate stability
5. Stability in foreign exchange markets
Should Price Stability Be the Primary Goal of Monetary Policy?
• Hierarchical versus Dual Mandates:
– Hierarchical mandates put the goal of price stability first, and then say
that as long as it is achieved other goals can be pursued
– Dual mandates are aimed to achieve two coequal objectives: price
stability and maximum employment (output stability)
• Price Stability as the Primary, Long-Run Goal of Monetary Policy
– Either type of mandate is acceptable as long as it
operates to make price stability the primary goal in the long run but not
the short run.
Inflation Targeting
• Public announcement of medium-term numerical target for inflation
• Institutional commitment to price stability as the primary, long-run goal of
monetary policy and a commitment to achieve the inflation goal
, • Information-inclusive approach in which many variables are used in making
decisions
• Increased transparency of the strategy
• Increased accountability of the central bank
• New Zealand (effective in 1990)
• Inflation was brought down and remained within the target most of the
time.
• Growth has generally been high, and unemployment has come down
significantly.
• Canada (1991)
• Inflation decreased since 1991; some costs in term of unemployment
• United Kingdom (1992)
• Inflation has been close to its target.
• Growth has been strong, and unemployment has been decreasing.
• Advantages:
• Does not rely on one variable to achieve target
• Easily understood
• Reduces potential of falling in time-inconsistency trap
• Stresses transparency and accountability
• Disadvantages:
• Delayed signaling
• Too much rigidity
• Potential for increased output fluctuations
• Low economic growth during disinflation
Figure 1 Inflation Rates and Inflation Targets for New Zealand, Canada, and the
United Kingdom, 1980–2017
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