Week 5 Flashcards
What is the most important goal of monetary policy?
The most important goal of monetary policy is price stability which is low and stable inflation.
What is the time inconsistency problem?
Having a good plan in long term but falling to short term temptations. For policy makers pursuing expansionary monetary policy
What are the five other goals monetary policy makers seek?
1: high employment and output stability
2: economic growth
3: stability of financial markets
4: interest rate stability
5: forex stabilty
Is the full employment goal unemployment at 0%
No full employment goal is around 4-5% taking into account structural and frictional unemployment
What is the level of output called at full employment?
The natural rate of output
Why is interest rate stability important?
To prevent uncertainty for consumers, businesses and financial markets. Fluctuations in rates make it harder to plan for future
What is a hierarchal mandate?
Puts the goal of price stability first then once achieved other goals can be pursued. ECB.
What is a dual mandate?
Seeks two objectives at the same time for example Fed seeks price stability and max employment
Which mandate is best?
Both are acceptable if price stability is primary long term goal
Hierarchal: high output fluctuations
Dual: can lead to overly expansionary policy
What is inflation targeting
Setting an inflation target over the medium term and making it public and seeking to achieve it
What are advantages of inflation targeting
Increased accountability of central bank and higher transparency. Reduces time inconsistency problem and reduces political pressures on central bank
What is a nominal anchor?
A nominal variable such as the inflation rate or money supply which ties down the price level to achieve price stabilty
How does the fed operate monetary policy
Known as the just do it approach. Don’t use anchor or inflation targeting. But price stability important goal. Seeks to predict future inflation
What are advantages and disadvantages of just do it approach
Advantages: active not reactive to inflation and good record
Disadvantages: lack of policy transperancy
How does a central bank achieve its monetary policy goals
The central bank uses tools to change policy instruments to meet intermediate targets then policy goals
