Expectations and monetary policy Flashcards
In general, when talking about the question of unemployment, decrease in the policy rate and long-term interest rate how do they operate?
do not operate in a vacuum
The Response of Output to a Monetary Expansion: Predictions from 10 Models
output will increase for some time in response to a monetary expansion
–> the size and the length of the output response is large
IMF, OECD: definition
The IMF (International Monetary Fund) and the OECD (Organisation for Economic Co-operation and Development) serve distinct roles but often work in tandem to promote economic stability and growth worldwide
models to predict the response of monetary expansion
3 are used by central banks
4 are international organizations (IFRM and OECD)
Should uncertainty about the effects of policy lead policymakers to do less?
yes, uncertainty should lead policymakers to exercise caution and potentially do less
Does the Fed know the exact value of the natural rate of unemployment ?
No, Fed does not know any of these things with certainty
What is the natural rate of unemployment?
The natural rate of unemployment is the level of unemployment that exists when the economy is at full capacity, not influenced by cyclical factors.
Why is it important for the Fed to consider the range of responses from different models when adjusting policy rates?
The range of responses indicates uncertainty about the effects of policy changes, which can significantly impact economic outcomes
What potential risks are associated with making aggressive policy rate changes based on uncertain outcomes?
Aggressive changes can lead to unintended consequences, such as excessive inflation or further economic instability, if the predicted effects do not materialize.
How does uncertainty in economic models affect the decision-making process of policymakers?
Uncertainty can lead policymakers to adopt more conservative approaches to avoid risks associated with unpredictable outcomes
What is a safer alternative for policymakers when faced with uncertainty about economic responses?
A safer alternative is to implement smaller, incremental changes to policy rates rather than large adjustments.
–> fine tuning
Multiplicative uncertainty: definition
type of uncertainty where the effects of certain variables or parameters can compound or multiply, leading to a broader range of possible outcomes
This uncertainty should lead policymakers to be what ?
- cautious
-to limit the use of policies
The higher unemployment or the higher inflation.. the more ?
the more active the policies should be
Fine-tuning
refers to the practice of making small adjustments to economic policy measures with the goal of achieving specific targets, such as constant levels of unemployment or stable output growth
Why are the effects of macroeconomic policy uncertain (another reason) ?
the interaction of policy and expectations
Methods of optimal control
to determine the best possible way to influence a dynamic system over time to achieve a desired outcome. It involves selecting a control policy or strategy that minimizes or maximizes a certain objective, often subject to constraints.
Why have economists moved away from the methods of optimal control in macroeconomic policy?
Economists have shifted their perspective, realizing that the economy is fundamentally different from a machine, as it involves strategic interactions among people and firms that respond to both current and expected future policies.
What are the new way of the thinking about macro policy ?
game theory
game theory : definition
a game between the policymakers and “the economy” more concretely, the people and firms in the economy
Game theory is not what ?
not a “entertainment”
–> It’s a strategic interaction between players
who are the player ?
- policymaker
- people
- firms
Why do governments refuse to negotiate with hostage takers?
To deter hostage taking by making it unattractive; negotiation would encourage future incidents.
What happens if a government negotiates after a hostage is taken?
It undermines their policy, leading hostage takers to expect negotiations and increase hostage situations.