1. MONETARY ECONOMICS EFFECTIVENESS OF MONETARY POLICY AND RATIONAL EXPECTATION

2. Content Relative effectiveness of Monetary Policy – the IS-LM again… Intermediate Targeting Keynesian versus Monetarist Rational Expectations Is Monetary Policy Effective?

3. Effectiveness of Monetary Policy CASE I: Interest rate Elasticity of Money demand is inelastic (Classical Economists: MD depends only on Income) Fiscal PolicyMonetary Policy

4. Effectiveness of Monetary Policy Case II: Liquidity Trap (Keynesian believes that MD is ultra sensitive to interest rate )

5. Effectiveness of Monetary Policy Case III: Investment is interest rate inelastic

6. Intermediate Targeting Framework

9. Keynesian versus Monetarist Keynesian recognizes market failures and thus the need for stabilization policies. Keynesian tends to prefer fiscal policy action given the belief that MD can be ultra sensitive to interest rate. The essence of monetarist is the QTM. That is, MV = PY Both Keynesian and Monetarist agree that shift in money supply can influence income at least in the short run. Monetarist also recognizes the followings; - While money supply affects nominal income (PY), to what extent it will influence Y and P separately is unknown. - The lag effect of monetary policy is unknown - Inflation is a monetary phenomenon As such, Monetarist prefers a fixed money growth rule to provide a stable monetary platform for the real sector activities.

10. Rational Expectations Key Article: Rational Expectation and the Theory of Economic Policy Sargent T. J. and Wallace, N. (1976) Journal of Monetary Economics

11. DISCUSSION After our discussion on: - Monetary Transmission Mechanisms - Game-theoretic approach to Monetary Policy - Monetary Policy Effectiveness and Intermediate Targeting - Rational Expectations SHOULD WE RELY ON MONETARY POLICY TO HANDLE OUR ECONOMIC FATE?