1. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. CHAPTER 26 The Process of Monetary Policy Formulation

2. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. A Conceptual Overview of the Macroeconomic Policy Process Policy Goals Stable Prices Sustainable GDP Growth Full Employment Satisfactory External Balance Alter GuidePolicy Actions Spending Saving Borrowing Lending Expected Economic Performance

3. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Lags in the Policy Process Policy makers decide what to do. Recognition Lag Policy Lag Impact Lag A change in the economy occurs. The change is recognized. Policy makers act. Time A BCD

4. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Maintaining an Interest Rate Target Interest Rate Quantity of Money MS D MS' iTiT D'D'

5. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Targeting Both an Interest Rate and an Aggregate ???? Interest Rate Quantity of Money MS D MS' iTiT D'D' i'i' MTMT MIMI

6. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Economic Projections for 2001 and 2002 in Percents Change, fourth quarter to fourth quarter 1 Nominal GDP Real GDP 2 PCE prices Average level, fourth quarter Civilian unemployment rate Change, fourth quarter to fourth quarter 1 Nominal GDP Real GDP 2 PCE prices Average level, fourth quarter Civilian unemployment rate 1 Change from average for fourth quarter of previous year to average for fourth quarter of year indicated. 2 Chain-weighted SOURCE: Monetary Report to the Congress (July 2001). 3¼ to 5 1 to 2 2 to 2¾ 4¾ to 5 3½ to 4¼ 1¼ to 2 2 to 2½ 4¾ to 5 Board of Governors and Reserve Bank Presidents IndicatorRangeCentral Tendency 2001 2002 4¾ to 6 3 to 3½ 1½ to 3 4 ¾ to 5½ 5 to 5½ 3 to 3¼ 1¾ to 2½ 4¾ to 5¼