Chapter 28 Flashcards
Money Demand and use in assessing stability of velocity
- money demand is used in assessing the stability of velocity
- when money demand is stable, this implies that there is stable velocity and when money demand is unstable, this implies velocity is unstable
Stability of Velocity and reasons for instability
Velocity is unstable because:
- proliferation of money substitutes- people hold more MMMF, repo markets, and non-banks. Basically, when their people are attracted to other areas than M1.
- High interest rates- people hold other assets rather than DD when interest rates are higher b/c they can gain more
- Technological change- rise in ATM, credit cards, electronic banking, MMMF. All these might change the money supply
- Drop in money supply will raise velocity and this is from people going into other areas other than currency and DD
Time Lags and Monetary Policy
- data lag-time between change in economy and subsequent data. Not too long for monetary policy
- Recognition lag- between receipt of data and confirmation of need for policy change. Not too long for monetary policy
- Legislative lag- not relevant for monetary policy, going through congress. This could take awhile but effects are relatively short after fiscal policy is passed.
- Implementation lag- time between recognition and actual implementation. Not too long for monetary policy
- Impact (effectiveness) lag- most important, lag between implementation and real economic impact. Longer for monetary policy and shorter for fiscal policy.
Structural Model “The Fed Model”
- Structural model is preferred by Keynesians and the Federal reserve
- Ms or monetary policy => change in interest rates => change in investment spending => change in aggregate demand => change in GDP
- This is current model and accounts for more than the reduced form
- Usually used from IR policy
Reduced Form Model
- Usually used by monetarists that prefer the aggregates policy
- Usually contributes change in GDP directly with money supply assuming that velocity is constant
- Change in money supply (FIX THIS)
Impact of monetary policy on interest rates
- analysis says increase in money supply will lead to decrease in rates
- interest rate movement from monetary policy mostly depends on the economy
- initial liquidity can move rates below original levels 6 months to year after, but inflationary expectations can move rates up after this. If economic expansion policy happens close or very close to full employment and full capacity then raise in liquidity could see a raise in interest rates b/c of inflationary expectations.
Which policy do you use when Velocity is stable, unstable?
Stable = aggregates policy Unstable = interest rate policy
Name the 3 reasons for unstable velocity
- Proliferation of money substitutes
- High (sometimes variable) interest rates
- Technological change
Name the 5 time lags
- Data Lag
- Recognition Lag
- Legislative Lag
- Implementation Lag
- Impact (Effectiveness) Lag
Define Data Lag
Time lag between change in economy and subsequent data
Define Recognition Lag
Between receipt of data and confirmation of need for policy change
Define Legislative Lag
Not relevant for monetary policy
Define Implementation Lag
Time between recognition and actual implementation
Define Impact (Effectiveness) Lag
Most important? Lag between implementation and real economic impact
What are the 2 economic models?
- Structural - Keynesians prefer
2. Reduced form - monetarists prefer
