The Conduct of Monetary Policy

1. The Conduct of Monetary Policy Presented by ChenYu

2. Outline • Intermediate target • Secondary instruments and objectives • Role of the central bank in micro policy

3. Intermediate Target • Introduction of intermediate target • Reasons for use of intermediate target • Criteria for choosing intermediate targets • The choice of intermediate targets • Monetary aggregate • Exchange rate • The direct targeting of inflation

4. Reasons for use of intermediate targets • The central bank can not directly influence the goals of monetary policy. But it has a set of tools to employ that can affect the goals indirectly after a period of time, typically more than a year. If the central bank waits to see what the goals will be one year later, it will be too late to make any corrections to its policy.

5. Criteria for choosing intermediate targets • Measurability • Controllability • Predictable effect on goals

6. Monetary Aggregate • Introduction • Abandonment of monetary target • Financial innovation and deregulation make definition and measurement of money difficult. • Breakdown in the stable relationship between a money stock and nominal income.

7. Exchange Rate • Advantages • Credibility • Security • Disadvantages • Applicability

8. The Direct Targeting of Inflation • Difficulties of using direct target • Long and variable lags • Uncertainty about responses within the economic system • A model of the interrelationship between loans for real property and property prices

9. A model of the interrelationship between loans for real property and property prices • Set up a model • Analyses • Conclusion • Policy suggestions

10. Set up a model • LD ,LS are the demand and supply of loans for real property • P is the price level of property • i is the nominal interest rate • is expected rate of appreciation

11. Analyses

12. Conclusion • The rise in inflation is almost bound to be accompanied by a worsening of inflationary expectations. Hence in order to raise real interest rates, nominal interest rates must be raised significantly indeed.

13. Policy Suggestions • Given the sources of dynamic instability and the long and variable lags within the economy ,the monetary authorities need to be brave in the face of uncertainty ,and be prepared to vary interest rates earlier and more violently than their natural caution would entertain.

14. Secondary Instruments and Objectives • Secondary objectives • External balance, Financial stability, Economic growth etc. • Secondary instruments • Debt management • Direct control

15. Micro Policy • Meaning of micro policy • Two issues about the role of the central bank in micro policy supervision: • The boundary for central banks’ micro-level responsibilities • The division of responsibilities • No agreement on the appropriate ambit and functions of a central bank at the structural, regulatory level.

16. Meaning of micro policy • Micro policy means the central bank’s concerns with the structure and stability of the banking system.

17. Are there clear dividing lines between those parts of system, for which the central bank should have the lead regulatory responsibility, and those for which it should not ?

18. The central bank should have concern for financial systemic stability, which make it to maintain its regulatory oversight over the main monetary institutions in the country. Moreover, the fuzzy distinctions between banks and non-banks also blur central bank’s micro-level responsibilities.

19. The division of responsibilities • Should macro responsibilities be given to the central bank and micro to some other bodies? • Pro for three reasons • This division is not feasible

20. 1: Since the central bank is independent of political control (in some countries), given micro-structural powers, it seems too powerful relative to the democratic, political process. • 2: Concern with micro-level banking stability might divert the central bank’s focus from its primary responsibility of achieving price stability • 3: Micro-level action, notably LOLR, could infect monetary policy in an inflationary fashion.

21. Who could replace the central bank to provide last resort loans when sizeable deposit withdrawals from banks ,whose solvency subject to doubt, causes banking crises?

22. Other banks would not lend to such risky brethren. • Without the last resort loans, contagious panic could radically alter the structure of financial institutions, with a flight to those institutions perceived as relatively safer.

23. The End Thank you for your attention! Q& A