Mishkin PPT Ch16
Mishkin PPT Ch16
The Conduct of
Monetary Policy:
Strategy and
Tactics
Monetary Targeting I
United States
Fed began to announce publicly targets for
money supply growth in 1975.
Paul Volker (1979) focused more in nonborrowed
reserves
Greenspan announced in July 1993 that the Fed
would not use any monetary aggregates as a
guide for conducting monetary policy
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Monetary Targeting II
Japan
In 1978 the Bank of Japan began to announce
forecasts for M2 + CDs
Bank of Japans monetary performance was
much better than the Feds during 1978-1987.
In 1989 the Bank of Japan switched to a tighter
monetary policy and was partially blamed for the
lost decade
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Monetary Targeting
Flexible, transparent, accountable
Advantages
Almost immediate signals help fix inflation
expectations and produce less inflation
Almost immediate accountability
Disadvantages
Must be a strong and reliable relationship
between the goal variable and the targeted
monetary aggregate
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Inflation Targeting I
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
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Inflation Targeting II
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 then, some costs in term of
unemployment
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Disadvantages
Delayed signaling
Too much rigidity
Potential for increased output fluctuations
Low economic growth during disinflation
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Disadvantages
Lack of transparency and accountability
Strong dependence on the preferences, skills, and
trustworthiness of individuals in charge
Inconsistent with democratic principles
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NAIRU
Rate of unemployment at which there is no tendency for
inflation to change
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Historical Perspective I
Discount policy and the real bills doctrine
Discovery of open market operations
The Great Depression
Reserve requirements as a policy tool
Thomas Amendment to the Agricultural Adjustment Act of
1933
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Historical Perspective II
Targeting money market conditions
Procyclical monetary policy
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