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.
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
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
Flexible: don’t ignore things other than inflation
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.
Does not rely on one variable to achieve target
Reduces time-inconsistency risk
Stresses transparency and accountability
Too much rigidity??? – Really not
Potential for increased output fluctuations
Low economic growth during disinflation
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 dot.com … ok
2007 housing bubble … ouch!!!
Targeting the Federal Funds Rate
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
Source: Federal Reserve: www.federalreserve.gov/releases and author’s calculations.
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?
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
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
Preemptive strikes against inflation
Preemptive strikes against economic downturns and financial disruptions
International policy coordination