Chp. 13 Flashcards
Monetary Policy (14 cards)
Quantity theory of money (QTM)
π=∆M/M
Money supply is the nominal anchor for the economy
Wages and prices are assumed to be perfectly flexible. Economy is always at MRE (y=ye)
Controlling the growth rate of money supply will allow policy makers to controle the rate of inflation
Modified PC (X=chi) (@= Alpha)
πt= [XπT+(1-X)πt-1]+@(yt-ye)
Monetary targeting (M-targ)
Relationship between narrow money and inflation is weak
When CB chooses a monetary aggregate as a target, fiscal system switches to substitute
M-TARG was proved to be flawed (Thatcher)
Cold turkey
Archive faster a decrease in inflation, but with a sharper increase in unemployment
If ß= unendlich MR =————
Gradualism
Unemployment rises less, but the disinflation process takes longer
Gradualist approach
ẞ < 1 unemployment avers, disinflation takes longer
Is Cumulative unemployment higher, if inflation avers?
No, it’s independent of the degree of inflation aversion, but only if Phillips curves are linear (doesn’t matter, if PC is steeper)
When will cumulative unemployment be higher
?
If PC are convex under cold turkey
What is the Taylor Rule?
It tells CB what interest rate it should choose to implement its out put gap. It expresses the interest rate the CB should choose to archive it’s objective in terms of the current state of the economy.
r0-rs = [1/a(@+(1/@ß))] ×(π0-πT)
TR: if @ increases
PC is steeper and MR is flatter. Smaller r responses to π shock.
TR: if a increases
IS is flatter (high interest rate (r) sensitivity of AD). Smaller response to π shock from CB
Higher inflation aversion leads to:
Flatter MR curve, more aggressive in raising r to dampen π, even if unemployment rises a lot, cold turkey approach
What does the best interest rate depend on?
Inflation aversion (ß), PC slope (@), interest sensitivity of AD (a) ie IS slope
TR: ß increases
If ß increases, response of CB is higher on interest rate changes
