Chapter
This presentation is the property of its rightful owner.
Sponsored Links
1 / 14

chapter 20 PowerPoint PPT Presentation


  • 57 Views
  • Uploaded on
  • Presentation posted in: General

chapter 20. Monetary Policy Strategy: The International Experience. Role of a Nominal Anchor. Ties Down  Expectations Helps Avoid Time-Inconsistency Problem 1. Arises from pursuit of short-term goals which lead to bad long-term outcomes

Download Presentation

chapter 20

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Chapter 20

chapter 20

Monetary Policy Strategy: The International Experience


Role of a nominal anchor

Role of a Nominal Anchor

  • Ties Down  Expectations

  • Helps Avoid Time-Inconsistency Problem

    • 1. Arises from pursuit of short-term goals which lead to bad long-term outcomes

    • 2. Time-inconsistency resides more in political process

    • 3. Nominal anchor limits political pressure for time-inconsistency


Exchange rate targeting

Exchange-Rate Targeting

  • Advantages

    • 1. Fixes  for internationally traded goods

    • 2. Anchors  expectations

    • 3. Automatic rule, avoids time-inconsistency

    • 4. Easy to understand: “sound currency” as rallying cry

    • 5. Helps economic integration

    • 6. Successful in reducing 

    • France, UK, Mexico


Exchange rate targeting1

Exchange-Rate Targeting

  • Disadvantages

    • 1. Loss of independent monetary policy

    • Problems after German reunification: UK, French monetary policy too tight

    • 2. Open to speculative attacks

    • Europe, Sept. 1992; Mexico: 1994; Asia: 1997

    • 3. Successful speculative attack disastrous for emerging market countries because it leads to financial crisis

    • 4. Weakened accountability: lose exchange-rate signal


Currency boards vs dollarization

Currency Boards vs. Dollarization

  • Currency Boards

    • 1. Domestic currency exchanged at fixed rate for foreign currency automatically

    • 2. Fixed exchange rate with very strong commitment mechanism and no discretion

    • 3. Usual disadvantages of fixed exchange rate

    • 4. Still subject to speculative attack

    • 5. Lose ability to have lender of last resort

  • Dollorization

    • 1. Even stronger commitment mechanism

    • 2. No possibility of speculative attack

    • 3. Usual disadvantages of fixed exchange rtae

    • 4. Lose seignorage


Summary advantages and disadvantages of different monetary policy strategies

Summary: Advantages and Disadvantages of Different Monetary Policy Strategies


Summary advantages and disadvantages of different monetary policy strategies1

Summary: Advantages and Disadvantages of Different Monetary Policy Strategies


Monetary targeting

Monetary Targeting

  • Canada

    • 1. Targets M1 till 1982, then abandons it

    • 2. 1988: declining  targets, M2 as guide

  • United Kingdom

    • 1. Targets M3 and later M0

    • 2. Problems of M as monetary indicator

  • Japan

    • 1. Forecasts M2 + CDs

    • 2. Innovation and deregulation makes less useful as monetary indicator

    • 3. High money growth 1987-1989: “bubble economy,” then tight money policy

  • Germany and Switzerland

    • 1. Not monetarist rigid rule

    • 2. Targets using M0 and M3: changes over time

    • 3. Allows growth outside target for 2-3 years, but them reverses overshoots

    • 4. Key elements: flexibility, transparency, and accountability


Monetary targeting1

Monetary Targeting

  • Advantages

    • 1. Able to cope with domestic considerations

    • 2. Signals are immediate

    • 3. Immediate accountability of central bank

  • Disadvantages

    • 1. Big if: all advantages require reliable relationship between goal and targeted aggregate

    • 2. In many countries, weak relationship between goal and M-aggregate

    • Poor communications device and accountability


Inflation targeting

Inflation Targeting

  • Five Elements

    • 1. Public announcement of medium-term š-target

    • 2. Institutional commitment to price stability

    • 3. Information inclusive strategy

    • 4. Increased transparency through public communication

    • 5. Increased accountability


Inflation targeting in new zealand canada and the uk

Inflation Targeting in New Zealand, Canada, and the UK


Inflation targeting1

Inflation Targeting

  • Advantages

    • 1. Allows focus on domestic considerations

    • 2. Not dependent on reliable relationship between M-aggregate and inflation

    • 3. Readily understood by public

    • 4. Reduce political pressures for time-inconsistent policy

    • 5. Focus on transparency and communication

    • 6. Increased accountability of central bank

    • 7. Performance good:  and e , and stays low in business cycle upturn


Inflation targeting2

Inflation Targeting

  • Disadvantages

    • 1. Delayed signalling

    • 2. Too much rigidity

    • 3. Potential for increased output fluctuations

    • 4. Low economic growth

  • Nominal GDP Targeting

    • 1. Close to inflation targeting with concern about output fluctuations

    • 2. Problem of announcing specific target for real GDP growth

    • 3. Harder for public to understand


Monetary policy with an implicit nominal anchor

Monetary Policy with an Implicit Nominal Anchor

  • Forward-Looking and Preemptive to Deal With Long Lags

  • Advantages

    • 1. Focus on domestic considerations

    • 2. Has worked very well in the U.S.

    • 3. If It Ain’t Broke Why Fix It

  • Disadvantages

    • 1. Lack of transparency and accountability

    • 2. Dependence on personalities

    • 3. Inconsistent with democratic principles


  • Login