mishkin ppt ch16

8/19/2019 Mishkin PPT Ch16

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Copyright © 2010 Pearson Addison-Wesley. All rights reserved.16-2

Monetary Targeting I

• United States

– Fed began to announce publicly targets formoney supply growth in 1975.

– aul !ol"er #1979$ focused more in nonborrowedreser%es

– &reenspan announced in 'uly 199( that the Fedwould not use any monetary aggregates as a

guide for conducting monetary policy


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Monetary Targeting II

• 'apan

– )n 197* the +an" of 'apan began to announce ,forecasts- for / 0 2s

– +an" of 'apan3s monetary performance wasmuch better than the Fed3s during 197*419*7.

– )n 19*9 the +an" of 'apan switched to a tightermonetary policy and was partially blamed for the

,lost decade-


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Monetary Targeting III

• &ermany

– he +undesban" focused on ,central ban"money- in the early 1976s.

– monetary targeting regime can restraininflation in the longer run8 e%en when targetsare missed.

– he reason of the relati%e success despitemissing targets relies on clearly statedmonetary policy obecti%es and central ban"engagement in communication with the public.


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Monetary Targeting

• Fle:ible8 transparent8 accountable

• d%antages

– lmost immediate signals help fi: inflation

e:pectations and produce less inflation

– lmost immediate accountability

• 2isad%antages

– ust be a strong and reliable relationshipbetween the goal %ariable and the targetedmonetary aggregate


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Inflation Targeting I

• ublic announcement of medium4term numericaltarget for inflation

• )nstitutional commitment to price stability as the

primary8 long4run goal of monetary policy and acommitment to achie%e the inflation goal

• )nformation4inclusi%e approach in which many%ariables are used in ma"ing decisions

• )ncreased transparency of the strategy

• )ncreased accountability of the central ban"


7/25Copyright © 2010 Pearson Addison-Wesley. All rights reserved.16-7

Inflation Targeting II

• ;ew



Inflation Targeting III

• d%antages– 2oes not rely on one %ariable to achie%e target

– >asily understood

– ?educes potential of falling in time4inconsistency trap

– Stresses transparency and accountability

• 2isad%antages

– 2elayed signaling– oo much rigidity

– otential for increased output fluctuations

– @ow economic growth during disinflation



FIGUR 1 )nflation ?ates and )nflation argetsfor ;ew


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Monetary Policy !ith anI"plicit #o"inal $nchor

• here is no e:plicit nominal anchor in theform of an o%erriding concern for the Fed.

• Forward loo"ing beha%ior and periodic

,preempti%e stri"es- • he goal is to pre%ent inflation from getting

started.



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Monetary Policy !ith anI"plicit #o"inal $nchor II

• d%antages– Uses many sources of information

– %oids time4inconsistency problem

– 2emonstrated success

• 2isad%antages– @ac" of transparency and accountability

– Strong dependence on the preferences8 s"ills8 andtrustworthiness of indi%iduals in charge

– )nconsistent with democratic principles



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Su""ary Ta%le 1 d%antages and2isad%antages of 2ifferent onetary olicyStrategies



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Tactics: Choosing the PolicyInstru"ent

• ools

– Dpen mar"et operation

– ?eser%e reEuirements

– 2iscount rate

• olicy instrument #operating instrument$

– ?eser%e aggregates

– )nterest rates

– ay be lin"ed to an intermediate target

• )nterest4rate and aggregate targets areincompatible #must chose one or the other$.



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FIGUR & @in"ages +etween entral +an" ools8olicy )nstruments8 )ntermediate argets8 and &oalsof onetary olicy


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FIGUR ' ?esult of argeting on;onborrowed ?eser%es


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Criteria for Choosing thePolicy Instru"ent

• Dbser%ability and easurability

• ontrollability

• redictable effect on &oals


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The Taylor Rule( #$IRU( andthe Phillips Cur)e

Federal funds rate target =

inflation rate + εθυιλιβριυµ ρεαλφεδ φυνδσρατε

+1/2 (ινφλατιον γαπ) +1/2 (ουτπυτ γαπ)

• n inflation gap and an output gap

– StabiliBing real output is an important concern

– Dutput gap is an indicator of future inflation as shown by

hillips cur%e• ;)?U

– ?ate of unemployment at which there is no tendency forinflation to change


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FIGUR * ?esult of argeting onthe Federal Funds ?ate


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Central +an,-s Response to $sset Price+u%%les: .essons Fro" the Su%pri"eCrisis

• sset4price bubbleA pronounced increase inasset prices that depart from fundamental%alues8 which e%entually burst.

• ypes of asset4price bubbles– redit4dri%en bubbles

• Subprime financial crisis

– +ubbles dri%en solely by irrational e:uberance


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• Should central ban"s respond to bubbles

– Strong argument for not responding to bubblesdri%en by irrational e:uberance

– +ubbles are easier to identify when asset pricesand credit are increasing rapidly at the sametime.

– onetary policy should not be used to pric"

bubbles.


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• acropudential regulationA regulatory policyto affect what is happening in creditmar"ets in the aggregate.

• entral ban"s and other regulators shouldnot ha%e a laisseB4faire attitude and letcredit4dri%en bubbles proceed without anyreaction.


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/istorical Perspecti)e I

• 2iscount policy and the real bills doctrine

• 2isco%ery of open mar"et operations

• he &reat 2epression

• ?eser%e reEuirements as a policy tool

– homas mendment to the gricultural dustment ct of19((

• Gar finance and the pegging of interest rates


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/istorical Perspecti)e II

• argeting money mar"et conditions– rocyclical monetary policy

• argeting monetary aggregates

• ;ew Fed operating procedures– 2e4emphasis of federal funds rate

• 2e4emphasis of monetary aggregates

– +orrowed reser%es target

• Federal funds targeting again– &reater transparency


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C i ht © 2010 P Addi W l All i ht d16-25

FIGUR 0 he aylor ?ule for theFederal Funds ?ate8 1976–/66*

Source: Federal ?eser%eA www.federalreser%e.go%Creleases and author3s calculations.

mishkin ppt ch16

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