Lesson 11-2 Problems and Controversies of Monetary Policy.

Slides:



Advertisements
Similar presentations
Section 3 Monetary Policy
Advertisements

Graphs in order to survive Mr. Forrest’s class
Taxes, Fiscal, and Monetary Policies
The influence of monetary and fiscal policy
IN THIS CHAPTER, YOU WILL LEARN:
The Importance of Macroeconomics
Interest Rates and Monetary Policy
MCQ Chapter 9.
The Federal Reserve and Monetary Policy
© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 16: Monetary Policy 1 of 30 The Federal.
The Influence of Monetary and Fiscal Policy on Aggregate Demand
C h a p t e r fourteen © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. Prepared by: Fernando & Yvonn.
Connecting Money and Prices: Irving Fisher’s Quantity Equation M × V = P × Y The Quantity Theory of Money V = Velocity of money The average number of times.
Slide 0 CHAPTER 9 Introduction to Economic Fluctuations In Chapter 9, you will learn…  facts about the business cycle  how the short run differs from.
1 The Policy Debate: Active or Passive? Chapter 31 © 2006 Thomson/South-Western.
Aggregate Demand and Supply
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Spec’n’ the Fed n What federal funds rate target will the FOMC set on Wednesday?
In this chapter, you will learn:
M ACROECONOMICS C H A P T E R © 2008 Worth Publishers, all rights reserved SIXTH EDITION PowerPoint ® Slides by Ron Cronovich N. G REGORY M ANKIW Introduction.
© 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair.
Macroeconomic Policy and Floating Exchange Rates
©2003 South-Western Publishing, A Division of Thomson Learning
Monetary Policy Monetary policy: The actions the Federal Reserve takes to manage the money supply and interest rates to pursue its economic objectives.
Chapter 32 Influence of Monetary & Fiscal Policy on Aggregate Demand
The Federal Reserve System
Copyright © 2004 South-Western 20 The Influence of Monetary and Fiscal Policy on Aggregate Demand.
Chapter 14: Monetary Policy  Objectives of U.S. monetary policy and the framework for setting and achieving them  Federal Reserve interest rate policy.
1 11 The Aggregate Supply Curve The Aggregate Supply Curve: A Warning Aggregate Supply in the Short Run Shifts of the Short-Run Aggregate Supply Curve.
Review of the previous lecture In the long run, the aggregate supply curve is vertical. The short-run, the aggregate supply curve is upward sloping. The.
Macro Chapter 14 Modern Macroeconomics and Monetary Policy.
Lesson 17-1 The Great Depression and Keynesian Economics.
Chapter 15: Monetary Policy
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide Stabilizing Aggregate Demand: The Role of the Fed.
Chapter 24 Strategies and Rules for Monetary Policy Introduction to Economics (Combined Version) 5th Edition.
Module 31 Monetary Policy & the Interest Rate
Macro Chapter 14 Modern Macroeconomics and Monetary Policy.
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 21 Monetary Policy and Aggregate Demand.
Harcourt Brace & Company Chapter 32 The Influence of Monetary and Fiscal Policy on Aggregate Demand.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 24 From the Short Run to the Long Run: The Adjustment of Factor Prices.
33 Monetary Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 15.
Principles of Macroeconomics: Ch. 20 Second Canadian Edition Chapter 20 The Influence of Monetary and Fiscal Policy on Aggregate Demand © 2002 by Nelson,
Money and Banking Lecture 45. Review of the Previous Lecture Long-run Aggregate Supply Curve Equilibrium and Determination of Output and Inflation Impact.
Of 241 Chapter 29 Monetary Policy in Canada. of 242 Copyright © 2005 Pearson Education Canada Inc. Learning Objectives 1. Explain the two methods by which.
Chapter 11 Monetary and Fiscal Policy Item Etc. McGraw-Hill/Irwin Macroeconomics, 10e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
16 Interest Rates and Monetary Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
The Federal Reserve System. FEDERAL RESERVE SYSTEM n The Federal Reserve System is charged with using monetary policy to control the money supply n Regulating.
The Influence of Monetary and Fiscal Policy on Aggregate Demand
Interest Rates and Monetary Policy Chapter 34 McGraw-Hill/IrwinCopyright © 2015 by McGraw-Hill Education. All rights reserved.
124 Aggregate Supply and Aggregate Demand. 125  What is the purpose of the aggregate supply-aggregate demand model?  What determines aggregate supply.
Unit 5: Monetary and Fiscal Policy Combined. Goals of Economic Policy Stabilizing the economy Keeping employment high Price level stable –If aggregate.
Macroeconomics Econ 2301 Dr. Frank Jacobson Coach Stuckey Chapter 11.
Monetary Policy. The Optimal Inflation Rate? The Optimal Inflation Rate?  Inflation has steadily gone down in rich countries since the early 1980s. 
Pump Primer : Define monetary policy. 31. Module Monetary Policy and the Interest Rate KRUGMAN'S MACROECONOMICS for AP* 31 Margaret Ray and David Anderson.
© 2007 Thomson South-Western. The Influence of Monetary and Fiscal Policy on Aggregate Demand Many factors influence aggregate demand besides monetary.
Objectives After studying this chapter, you will able to  Explain what determines aggregate supply  Explain what determines aggregate demand  Explain.
Copyright © 2004 South-Western 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand.
Chapter 15 Monetary Policy. Money Market – determines interest rate Demand for Money Transactions Speculative Precautionary Supply of money – controlled.
ECN 202: Principles of Macroeconomics Nusrat Jahan Lecture-10 Fiscal Policy & Monetary Policy.
AB204 Unit 8 Seminar Chapter 15 Monetary Policy.  The money demand curve arises from a trade-off between the opportunity cost of holding money and the.
Monetary Policy. The Optimal Inflation Rate? The Optimal Inflation Rate?  Inflation has steadily gone down in rich countries since the early 1980s. 
Monetary Policy and the Interest Rate. Fed Goals ● Fed Goals: Economic growth and price stability (inflation control) ● When the Fed wants to lower interest.
Monetary Policy It influences the Model of the Economy.
Chapter The Influence of Monetary and Fiscal Policy on Aggregate Demand 21.
Chapter 11 - Monetary Policy and the Fed Read pages I The Goals and Outcomes of Monetary Policy A)Goals of Monetary Policy Goals are not easy.
Copyright © 2004 South-Western 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand.
Krugman/Wells Macroeconomics in Modules and Economics in Modules Third Edition MODULE 38(74) Monetary Policy and the Interest Rate.
Monetary Policy and Fiscal Policy
The Influence of Monetary and Fiscal Policy on Aggregate Demand
Presentation transcript:

Lesson 11-2 Problems and Controversies of Monetary Policy

Lags Lags are the greatest obstacle facing the Fed in the implementation of monetary policy. The recognition lag is the time after a macroeconomic problem arises before policy- makers become aware of it. Caused by the unavailability of adequate data in a timely manner.

Caused by different indicators leading to different interpretations. The implementation lag is the time it takes after recognizing a macroeconomic problem to put a policy in place to deal with it. The implementation lag is quite short for monetary policy. The FOMC meets regularly eight times a year and can confer between meetings with conference calls. Once a decision is made, the open market operations to buy or sell government bonds can be implemented immediately.

The impact lag is the delay between the time a policy is put inplace and the time that policy affects the economy. It takes some time for the deposit multiplier process to work itself out. Consumers and firms need some time to respond to the monetary policy with new consumption and investment spending. The exchange rate may change fairly quickly but it takes time for net exports to adjust. The time estimates of lags vary.

The impact lag is estimated to be from 6 months to 2 years. The lag time is not constant and policymakers do not know which particular time frame will apply to their actions. Policy should be aimed at expected future problems rather than current problems implied by recent data.

Choosing Targets Interest Rates The Fed has used the federal funds rate as a sign of pressure on bank reserves in the past. The current goal is explicitly couched in terms of interest rate targets. To raise interest rates, the Fed sells bonds. To lower interest rates, the Fed buys bonds. Money Growth Rates

The Fed is required by law to announce at the beginning of a year a money growth rate for that year. The Fed actually sets a wide band within which the money growth should fall because of difficulty inherent in controlling the money supply itself. The current Fed pays little attention to money growth rates in setting monetary policy.

Price Level If stable prices constitute the main monetary policy goal, then the price level could be a target. Such a policy goal could lead to contractionary policy when the price level rose with a recessionary gap and would worsen the problem. Price level targets imply reacting to past problems rather than anticipating future problems.

Political Pressures The U.S. Fed is one of the most independent central banks in the world. The EU has modeled its central bank on the German model and is also very independent. The Fed was created by Congress and could be abolished or have its powers changed by Congress. The Fed Board of Governors and the FOMC members are likely to be influenced to some degree by political pressures.

The Degree of Impact on the Economy The impact of monetary policy on the economy is uncertain and varies in different time periods. Investment is volatile and may react more after one policy action than another. If expectations are pessimistic about the future course of the economy, those expectations may prevent more investment even when the interest rates fall.

Trying to encourage investment in the face of negative expectations is sometimes called “pushing on a string.” A liquidity trap exists when a change in monetary policy has no effect on interest rates. The liquidity trap would occur if the money demand curve were horizontal. John Maynard Keynes presented the liquidity trap in his book, The General Theory of Employment, Interest, and Money.

Rational Expectations The rational expectations hypothesis is that people use all available information to make forecasts about future economic activity and the price level, and that they adjust their behavior to these forecasts. This theory alters the adjustment process of the economy to a change in the money supply. Suppose an economy is in long-run equilibrium. An increase in the money supply shifts aggregate demand to the right.

Instead of adjustment to this shift gradually over time until a new equilibrium price level is reached at the intersection of long-run aggregate supply and the new aggregate demand, the rational expectations theory presumes that the jump in prices will occur immediately. Prices adjust immediately upon news of the money supply increase because every-one expects the price level to rise based on past experience and therefore alters behavior immediately If this occurs, there is no change in real GDP even in the short run.

This theory depends upon flexible wages and prices rather than sticky wages and prices discussed earlier. An implication of this theory is that contractionary policy could be painless. Most rational expectations theorists oppose using monetary policy for stabilization purposes.