UConn ECON 309 - Monetary Policy Rules (19 pages)

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Monetary Policy Rules



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Monetary Policy Rules

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Pages:
19
School:
University Of Connecticut
Course:
Econ 309 -

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Monetary Policy Rules Graduate Macroeconomics I ECON 309 S Cunningham Role of the fed funds rate term Taylor argued that the behavior of the federal funds rate incorporated in his rule is a reasonable approximation to the actual process of adjustment of the funds rate targets the FOMC used between 1987 and 1993 a period in which monetary policy was very successful 2 Taylor Rule Example funds rate t GDP price inflation t 2 0 0 5 GDP price inflation t 2 0 0 5 output gap t 3 Inflation Targeting Another approach to monetary policy known as inflation targeting has been instituted by the central banks in several foreign countries Its application varies from country to country started with the Reserve Bank of New Zealand and has been adopted by the Bank of Canada the Bank of England the Bank of Finland the Swedish Riksbank and the Reserve Bank of Australia These central banks announce in advance their policy objective for an inflation rate In none of these cases has the central bank specified the decision rule that it will use to achieve the stated objective 4 Monetary Policy Rules A rule can be defined as nothing more than a systematic decision process that uses information in a consistent and predictable way Poole s purpose is to examine what we mean by a monetary policy rule followed by a central bank and to examine what we know about the construction or design of the rule 5 Types of Rules Rules that govern our interaction with the environment Rules that govern our interaction with others A third type of rule involves the formulation of policy decisions Here a systematic decision making process is complicated because individuals and market participants observe or infer the actions of the policymakers and adjust their behavior in ways that work to their benefit given their understanding of the policy regime This is the type of problem faced by monetary policy decisionmakers Monetary policy is more like poker than like solitaire 6 What can Monetary Policy do There is now



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