"An up-to-date analysis of monetary policy, with a particular focus on the United Kingdom. The book considers questions about how it actually works in practice, and what it should do. It also considers many of the contributions made by economists, both theoretical and empirical, which shed light on monetary policy. One of the aims of the book is to impart this knowledge in an intelligible way to those with a reasonable grasp of basic economics"--
The literature on optimal monetary policy in New Keynesian models under both commitment and discretion usually solves for the optimal allocations that are consistent with a rational expectations market equilibrium, but it does not study whether the policy can be implemented given the available policy instruments. Recently, King and Wolman (2004) have provided an example for which a time-consistent policy cannot be implemented through the control of nominal money balances. In particular, they find that equilibria are not unique under a money stock regime and they attribute the non-uniqueness to strategic complementarities in the price-setting process. We clarify how the choice of monetary policy instrument contributes to the emergence of strategic complementarities in the King and Wolman (2004) example. In particular, we show that for an alternative monetary policy instrument, namely, the nominal interest rate, there exists a unique Markov-perfect equilibrium. We also discuss how a time-consistent planner can implement the optimal allocation by simply announcing his policy rule in a decentralized setting.
This paper examines the interactions of macroprudential policy and monetary policy in a New Keynesian DSGE model with financial frictions. Macroprudential policy can stabilize credit cycles. However, a macroprudential instrument that aims to stabilize a specific segment of the credit market can cause regulatory arbitrage, that is, a reallocation of credit to a less regulated part of the market. Within this model, welfare-maximizing monetary policy aims to stabilize only inflation and macroprudential policy only stabilizes credit. Two aspects of the model account for this dichotomy. First, credit stabilization is welfare improving because lower volatility is compensated by higher mean equilibrium credit and capital. Second, monetary policy is sub-optimal for credit stabilization. The reason is that it operates on the decisions of borrowers and savers, while macroprudential policy operates only on the decisions of borrowers.
This analysis addresses changing views of the role and effectiveness of monetary policy, inflation targeting as an “effective monetary policy, ” monetary policy and short-run (output) stabilization, and problems in implementing a short-run stabilization policy. (JEL E520) Federal Reserve Bank of St. Louis Review, September/October 2007, 89(5), pp. 447-89. The effectiveness of monetary policy has been a long-standing question in the monetary economics and central banking literature. Perspectives on the question have been influenced in part by developments in monetary theory and in part by interpretations of monetary history. Progress in the discussion has also been influenced—indeed, some might say hindered—by changing definitions of both “monetary policy ” and “effectiveness.” Our discussion will address (i) changing views of the role and effectiveness of monetary policy, (ii) inflation targeting as an “effective monetary policy, ” (iii) monetary policy and shortrun (output) stabilization, and (iv) problems in implementing a short-run stabilization policy.
Conducting monetary policy is a difficult business. It’s easy enough to set a policy goal such as price stability or low and stable inflation, but because monetary policy affects the economy with a lag, achieving those goals requires an ability to peer into the future. A change in the money supply or interest rates today won’t affect inflation for months, or even years, down the road. Consequently, policymakers use economic models and forecasts to help them make decisions. *Keith Sill is a senior economist in the Research Department of the Philadelphia Fed. Historically, economists and policymakers have used two major approaches to help predict
We construct a dynamic general equilibrium model in which household debt is sticky in nominal terms and debtor households are credit constrained. Interest payments on debt contracts may be at floating rates or fixed for the duration of the contract. A key result is that a simple static Taylor Rule can result in a prolonged period in which real interest rates are cut rather than raised in response to an inflationary shock. We show how the proportion of fixed rate contracts affects the monetary transmission mechanism and its implications for the distributional effects of an inflationary shock.
* This is a translation of a document written originally in Spanish. In case of discrepancy or difference in interpretation, the Spanish original prevails. Both versions are available at www.bcentral.cl.Contents */ Preface 5 Summary 7 Monetary policy decisions in the past three months 11 I. International scenario 13
/ This is a translation of a document originally written in Spanish. In case of discrepancy or difference in interpretation the Spanish original prevails. Both versions are available at www.bcentral.cl.Contents*/ Preface 5 Summary 7 Monetary policy decisions in the past three months 11 I. International scenario 13
/ This is a translation of a document originally written in Spanish. In case of discrepancy or difference in interpretation the Spanish original prevails. Both versions are available at www.bcentral.cl.Contents */ Preface 5 Summary 7 Monetary policy decisions in the past three months 13 I. International scenario 15
In 1979, Italy entered into the Exchange Rate Mechanism (ERM) as a founding member of the European Monetary System. After that date, the country’s monetary policy was geared toward the maintenance of exchange rate stability against its ERM partners, despite a number of exchange parity realignments and with the exception of the period from September 1992 to November 1996. 1 The strength of the ERM commitment was not uniform over time, either in terms of amplitude of the fluctuation band 2 or in terms of frequency of realignment of bilateral parities. Despite this variability, however, changes in official rates—the discount rate and the rate on fixed term advances—were overwhelmingly linked throughout the ERM period to developments in foreign exchange markets. The broad exchange-rate stability objective was made operational as a target range for the overnight interbank deposit rate. This target was articulated as a corridor (in the 1990s, of typical width between 1 and 1.5