Book: Monetary Policy Summary Flashcards
What is the liquidity trap
The fact that increased money supply no longer decreases the interest rate when it reaches zero
How does lower interest rates affect output
It increases with greater consumption
What is real, interest rate and borrowing rate
r = i - inflation, the borrowing rate is the policy rate plus risk premium
What interest rate affects private policy decisions
Real borrowing rate
How does a moneyary expansion affect the exchange rate
It decreases it, increasing output
How does a fixed exchange rate affect monetary policy
It anihalates it
What are the goals of monetary policy
Yo create a low and stable inflation and to maintain output around potential
Why does the central bank target interest tares and not the money growth
Because interest rates are the things that affect inflation and output but it can drastically shift with the demand for money that can change independent of the central bank due to f.ex credit cards
What is the divine coincidence
The fact that by keeping inflation on target unemployment reaches its natural rate and potential is reached
Inf = inf(e) - a(u(e)-u(p))
inf=inf(e) => u(e)=u(p)
What is flexible inflation targeting
Acting on deviation from target slowly
What is the Taylor rule
i the central bank should set = i(policy) + a(inf-inf(pol)) - b(u-u(n))
If inflation is at policy level and unemployment is natural what interest rate should be set
Policy rate
What interest rate should the central bank set if inflation is higher than target
Per its mission it should raise the interest rate above the policy rate to bring down inflation at the cost of greater unemployment
Why must the central bank raise the interest above policy more than the divergence from target inflation
Because what matters is the real interest rate that decreases one for one with inflation
How should the central bank react to abnormally high unemployment
Decrease interest rates below policy
What is the shoe leather cost
The insignificant cost of visiting the bank more often in the case of larger inflation
What are the costs of tax distortions during inflation
People often pay more than they should due to bracket creep and false capital gains rises due to inflation
What is the money illusion cost related to inflation
That during and inflation people and firms have it harder to make good financial decisions
How does inflation variability affect the economy
It increases the risks of bonds which increases borrowing rate that in turn decreases inflation
What are the benefits of inflation
Seniorage, money illusions affect on real wage adjustment and the ability to create negative real interest rates
What are the costs of inflation
Money, illusion, tax distortion, higher inflation variability and shoe leather costs
What are quantitative easing or credit easing programs
The central bank attempting to decrease the risk premium of assets in an economy by buying them with printed money
What measures have been taken in countries to limit bankruns
Deposit insurance and the central banks role as a lender of last resort
What does the consensus better lean than clean mean in macroeconomics
That it is less costly to take preemptive action even if strange numbers could be natural than to clean up after. Better pop bubbles early
What are macro prudential tools
Measures that target a specific troubled market rater than the entire economy like the interest rate
What is the LTV ratio
A macro prudential tool targeted at the housing market limiting the loan to value ratio that customers can buy houses for
What are some concerns regarding macroprudential tools
They are untested and can have complex side effects and they may give an independent central bank too much power
Do central banks use a target nominal money growth target
No, because of the poor relation between money supply and inflation. Instead the target interest rates to satiate money demand
