1. Lecture 32: Monetary policy goals, strategy and tactics – part two
Mishkin Ch16 – part B
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2. Introduction Monetary goal Monetary strategies
Monetary tactics – policy instruments
Monetary policy tools

3. Three monetary policy tools
Open market operation
Reserve requirements
Discount policy (discount rate)

4. Two policy instruments
Policy instruments (operating instruments): A variable that responds to the central bank’s tools and indicates the stance (loose or tight) of monetary policy
Two policy instruments:
Reserve aggregates: R, MBn, MB,
Interest rates: short-term interest rate
Interest-rate and aggregate targets are incompatible.
May be linked to an intermediate target: M2, long-term interest rate, which are more closely related to goals.

7. Criteria for choosing the policy instrument
Observability and measurability
time lag in measuring reserves
hard to measure real interest rate
Controllability
better control over nominal interest rates than over reserves
Predictable effect on goals
Interest rates link more closely to goals

8. The Taylor rule
Inflation target 2%, output potential, equilibrium real fed funds rate 2%
An inflation gap and an output gap
Stabilizing real output is an important concern
Output gap is an indicator of future inflation as shown by Phillips curve