Monetarism monetary targeting
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Monetarism & Monetary Targeting. Rules not discretion!! End monetary mischief!!! MV = PY … automatic stabilization??? M1? M2?? Innovations Does targeting M change V ??? Fed began to announce targets for money supply growth in 1975.

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Monetarism & Monetary Targeting

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Monetarism monetary targeting

Monetarism & Monetary Targeting

Rules not discretion!! End monetary mischief!!!

MV = PY… automatic stabilization???

M1? M2?? Innovations

Does targeting M change V???

Fed began to announce targets for money supply growth in 1975.

Paul Volker (1979) focused on nonborrowed reserves

Greenspan (July 1993)announced the Fed would not use any monetary aggregates to guide monetary policy

Nominal GDP targeting??? PY

Automatic stabilization???

Inflation targeting bernanke laubach mishkin posen 1999

Inflation TargetingBernanke, Laubach, Mishkin, Posen (1999)

NZ (1990), CN (1991), UK (1992), S, Su (1993)…Au,E,Is,Chile,Brazil

Announcement of medium-term numerical target for π

Institutional commitment to price stability as primary, long-run goal of monetary policy

Information-inclusive approach in which many variables are used in making decisions

Increased transparency of the strategy

πunderstood by all … B of E Inflation Report

Increased accountability of central bank

“Constrained discretion”

Flexible: don’t ignore things other than inflation

Monetarism monetary targeting

FIGURE 1 Inflation Rates and Inflation Targets for New Zealand, Canada, and the United Kingdom, 1980–2008

Source: Ben S. Bernanke, Thomas Laubach, Frederic S. Mishkin, and Adam S. Poson, Inflation Targeting: Lessons from the International Experience (Princeton: Princeton University Press, 1999), updates from the same sources, and www.rbnz.govt .nz/statistics/econind/a3/ha3.xls.

Inflation targeting

Inflation Targeting


Does not rely on one variable to achieve target

Easily understood

Reduces time-inconsistency risk

Stresses transparency and accountability


Delayed signaling

Too much rigidity??? – Really not

Potential for increased output fluctuations

Low economic growth during disinflation

Monetary policy with an implicit nominal anchor the greenspan standard

Monetary Policy with an Implicit Nominal Anchor … The Greenspan Standard

No explicit nominal anchor

Forward looking behavior and periodic “preemptive strikes”

Prevent inflation from getting started.

Bubbles and The Greenspan Put

1987 … ok

1998 LTCM … ok

2000 … ok

2007 housing bubble … ouch!!!

Monetarism monetary targeting

  • Tools

    • Open market operation

    • Reserve requirements

    • Discount rate

  • Policy instrument (operating instrument)

    • Reserve aggregates

    • Interest rates

  • Interest-rate and aggregate targets are incompatible (must chose one or the other).

Targeting nonborrowed reserves a monetary aggregate

Targeting Nonborrowed Reserves(a monetary aggregate)

Targeting the Federal Funds Rate

The taylor rule nairu and the phillips curve

The Taylor Rule, NAIRU, and the Phillips Curve

An inflation gap and an output gap

Stabilizing real output is an important concern

Output gap is an indicator of future inflation (Phillips Curve)


Rate of unemployment at which there is no tendency for inflation to change

ifftarget = 2% + π + .5(π – π*) + .5(Y – Yfe)

Fed policy stance, expectations and real interest rates

ireal = i – πe

Expectations hypothesis: Expected short-rates  long rates

The taylor rule for the federal funds rate 1970 2008

The Taylor Rule for the Federal Funds Rate 1970–2008

Source: Federal Reserve: and author’s calculations.

Central bank response to asset price bubbles lessons from the subprime triggered crisis

Central Bank Response to Asset Price Bubbles: Lessons From the Subprime Triggered Crisis

Credit-driven bubbles

Subprime triggered financial crisis

Bubbles driven solely by irrational exuberance

Bubbles are easier to identify when asset prices and credit are increasing rapidly at same time.

The “Greenspan Put”

Can’t judge when it’s a bubble and when it’s a “new era”

Include asset prices in measure of inflation?

Raising rates to prick a bubble can damage macroeconomy

Clean up after the bubble bursts.

Mishkin’s preference: “Macroprudential regulation”

Oppose feedbacks from credit - to asset prices - to credit

Raise credit standards … in shadow banking system too?

Historical perspective i

Historical Perspective I

Discount policy and the real bills doctrine

Discovery of open market operations

The Great Depression

Reserve requirements as a policy tool

Thomas Amendment to the Agricultural Adjustment Act of 1933

War finance and the pegging of interest rates

Historical perspective ii

Historical Perspective II

Targeting money market conditions

Procyclical monetary policy

Targeting monetary aggregates

New Fed operating procedures

De-emphasis of federal funds rate

De-emphasis of monetary aggregates

Borrowed reserves target

Federal funds targeting again

Greater transparency

Historical perspective iii

Historical Perspective III

Preemptive strikes against inflation

Preemptive strikes against economic downturns and financial disruptions



Subprime meltdown

International policy coordination

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