Monetary Institutions and Strategies

Question 1

What is the definition of “Adaptive expectations”?

Answer 1

• Theory that people’s expectations of a variable are based on past levels of the variable; also, backward-looking expectations

Question 2

Definition of Rational expectations:

Answer 2

• Theory that people’s expectations of future variables are the best possible forecasts based on all available information

Question 3

the Phillips curve:

Formula

The behavior of inflation depends on expectations

Answer 3

• “p” is inflation,
• “p​^e“ is expected inflation,
• Y~ is the output gap (the percentage deviation of output from potential),
• “x” is a coefficient showing how strongly output affects inflation

Question 4

Time-consistency problem

Answer 4

• A situation in which someone has incentives to make a promise but later to renege on it; because of these incentives, others don’t believe the promise

Lack of consistency

Question 5

Rational Expectations and Costless Disinflation (graph)

Answer 5

Question 6

Definition of “Conservative policymaker”?

Answer 6

• It is central bank official who believes it is more important to keep inflation low than to stimulate output

governments appoint the policymakers who run central banks.

if policymakers are conservative (or a clear economic believes) , the time-consistency problem disappears. The central bank can promise inflation of “p” ideal and people will believe it.

Question 7

With what option you solve the time consistency problem of the central bank?

Answer 7

1. Conservative Policymakers
2. Reputation
3. A Policy Rule

Question 8

How reputation of the head of the central bank can help to solve the time-consistency problem ?

Answer 8

• they would like people to believe that they are conservative (even if they are not). This concern can solve the time-consistency problem.
• When a new chairman is appointed , he/she can decide what reputation want according to it first actions.
• In this theory, it is desirable for policymakers to care a lot about their reputations. This happens if policymakers have long time horizons

Question 9

how to solve time-consistency with a policy rule?

Answer 9

• The government imposes a rule requiring the central bank to produce low inflation or not

Question 10

what argument use against the independence of the central bank ?

Answer 10

• Their central argument is a political one: in a democracy, elected officials should control economic policy.
• They fear that the priorities of central banks are those of financial interests, not ordinary citizens

Question 11

What are the arguments for central bank independence?

Answer 11

• A long-standing argument is that independence protects the Fed from political pressures for unwise policies
• Reduce the time-consistency problem (Conservative Central Bankers and Long Horizons)

Question 12

Definition of Discretionary policy:

Answer 12

• A monetary policy that is adjusted at each point in time based on the judgment of the central bank

Question 13

Definition of Monetary-policy rule:

Answer 13

• A simple rule or formula that tells the central bank how to run policy

Question 14

Who are the Monetarists ?

Answer 14

• They are school of economists who believe that monetary policy has strong effects on the economy and that policy should be set by a rule

Question 15

what are the problems with discretionary policy according to Monetarists?

Answer 15

1. Well-Intentioned Mistakes
2. Political Influence (some presidents still had influence)
   * All this could be solve with a set of rules

Question 16

what are the mains types of inflation targeting ?

Answer 16

• Strict targeting

Hitting the inflation target is the central bank’s only goal. If shocks push inflation away from the target, policy pushes it back as quickly as possible.

• Flexible targeting

The central bank is not concerned only with inflation; it also pays attention to the goal of output stability

In practice, it appears that central banks choose flexible inflation targeting.

Question 17

what are the arguments in favor Inflation targeting ?

Answer 17

• First, in many circumstances inflation targeting naturally stabilizes output as well as inflation.This fact follows from the Phillips curve
• inflation targeting is flexible

Question 18

what is Transparency for the central bank ?

Answer 18

• providing clear, detailed information about policymaking to the public

Question 19

how the central bank provided of information ? (tranparency)

Answer 19

• Many central banks issue publications that give the rationale for recent decisions.
• publish the economic forecasts produced by their staffs
• publish minutes of the meetings at which interest rates are set
• officials hold press conferences to explain their actions and take questions

Question 20

Why Practice Transparency? , according to the central banks

Answer 20

• political
• effect on inflation expectations
• helps policymakers control long-term interest rates