Class Note for ECON 311 at UMass(7)
Class Note for ECON 311 at UMass(7)
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Date Created: 02/06/15
7 January 22 7r What should Central Bankers do 39 l r t l l 39 quot GB U t f lE k S39 quot f Macroeconomic goals and the Lenders of Last Resort Copynght 2007 Pearson Addlsoanesley All thts reserv 161 Finals and Grading Expectations 39 Proofread spelling grammar S V citations 39 Organization Funnel Clear thesis statement Logical sequence Deal substantivey w course material go beyond course material if necessary Use your own words Originality Copyrrgm 2007 Pearson Addisoanesley All rrgme reserved 162 Peso Crisis rescue as Model Financiers made whole Taxpayers made to pay doubly so Outside power compels domestic social reorganization Systemic instability gt K flows to US Wall St as global intermediary gt recycle K flows back to ROWnew opportunities for ST financial gains Lather rinse repeat 2007 Pearson Addisoanesley All lights reserved 163 Consequences of the model IMF Riot Turkey Moral hazard hr I encourages more and bigger risktaking Countries must pursue exportled growth strategies hold nonproductive forex rather than real investment US and asset bubbles trade deficit and financialzation Accumulation by dispossession ammoalitwspeuerthyvfseand social instability 164 Transmission of Instability Real linkages commodities trading supply chains Perceived linkages expectations psychological effects Financial linkages interlocking payment obligations Policy mistakes beggar thy neighborquot may What role for these guys Goals of Monetary Polic quot11 Price stability incl exchange rate and I Full employment Economic growth Systemic stability well functioning financial system smooth business cycles Tools and Instruments to Achieve Goals 39 Tools Open market operation Reserve requirements Discount rate 39 Policy instruments operating instrument Reserve aggregates Interest rates May be linked to an intermediate target Copyright 2007 Pearson Addisoanesiey Aii rights reserved 168 Price Stability J39 7 Low stable inflation 39 Reduce uncertainty quot39 Better for growth Strains social fabric Nominal anchor money xchg rate Timeinconsistency problem Copyright 2007 Pearson Addisoanesley All rights reserved 169 Should Price Stability be the Primary Goal Mishkin says In the long run there is no conflict between the goals In the short run it can conflict with the goals of high employment and interestrate stability Which prices Hierarchical mandate dual mandate Deflationaryfinancial bias 2007 Pearson Addisoanesley All rights reserved 1610 How to target price stability 39 Monetary targeting 39 announced target of M1 and M2 growth 39 assumes CB can hit the targets 39 Relationship between Ms and other vars 39 Inflation targeting 39 announced targeted inflation rate 39 assumes low inflation gt high growth 39 easy to implement eval CB performance Copyright 2007 Pearson Addisoanesley All rights reserved 1611 Inflation Targeters Pland Czech Republic Hungary 39739 f a Colombia l j Peru n V Brazil Chlle South Africa 4 Also UK Canada Australia New Zealand Switzerland Sweden Iceland Norway Copynght 2007 Peavson Addlsoanesley All thts vesevved 1612 Inflation Targeting Problems What about other economic goals Inflation determination more complicated than underlying IT model No apparent difference between inflation performance of lTers and nonlTers Which prices to target Problems measuring prices Some evidence that IT leads to higher Y GDP volatility Distributionalconsequences Copyright 2007 Pearson Addisoanesley All rights reserved 1613 a New Zealand Inflation o 20 Inflation targeting begins Target range 15 Target midpoint 10 5 I I I I I I I I I I I 1981 19821983198419851986 198719881989 19901991 1992 19931994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 b Canada Inflation 15 Inflation targeting begins Target range 10 Target midpoint 5 0 IIIIIIIIIIIIIIIIII 1981 19821983198419851986 19871988 1989 19901991 1992 19931994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 F I G U RE 1 Inflation Rates and Inflation Targets for New Zealand Canada and the United Kingdom 1980 2005 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 wwwrbnzgovtnzstatisticseconindasha3xls continues Copyright 2007 Pearson Addison Wesley All rights reserved 1614 0 United Kingdom Inflation 25 Inflation targeting 20 begins Target range Target midpoint 15 10 I l l l 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 F I G U RE 1 Inflation Rates and Inflation Targets for New Zealand Canada and the United Kingdom 19802005 continued 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 MNwrbnzgovtnzstatisticseconindaSha3xls Copyright 2007 Pearson AddisonWesley All rights reserved 1615 a New Zea am ln aunn my 2 Innnun largeung new larval mm angnl mupnmx me VIlv 39r39 quotYquotV mmummgmwmmmmwmmmmsmewmnmmmmmmmm momma Inuamnn m 5 lnmlwn Iargwng hewns was my mum mvapaw m a 2 1Hy y VHIH V ummumHungary nmusn mmwwz amumkusswuwmImmmmmvzmmxmmzm a Unned Kingdnm manna my 25 w ahnn largelmg 2 bwguvs angal nngw Yamsl mvapovm 15 wA AIIII 1 xx 15 vmzIglnunsanmwn ruuymuwvwvxmim wussvmuwnwmmmzmvzmmzmmsm FIGURE I lnflalinn um and ln a un Iiigenial New mind tank and d1 uniud Kingdom waozuns a New mum b Ca ada e Unked Kingdum Sauna nus Mam mmmuwn manusmnm mms mmnam Vargwmgnumm mmunmmdeymm mm mum WWW p65 995 mean mum m Wmmm n Copy ght 2007 Pearson Addwsoeres ey AH nghts reserved 1616 The Taylor Rule NAHU and the Phi lips Curve FFR target in ation rate FFR 12 in ation gap 12 output gap An inflation gap and an output gap Stabilizing real output is an important concern Output gap is an indicator of future inflation as shown by Phillips curve 39 NAIRU Rate of unemployment at which there is no tendency for inflation to change Copyright 2007 Pearson Addisoanesley All rights reserved 1617 Federal Funds Rate 20 Taylor Rule 1 5 10 Federal Funds Rate 0 I I I I I I I I I 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 F I G URE 4 The Taylor Rule for the Federal Funds Rate l9102005 Source Federal Reserve wwwfederaIreservegovreleases and author s calculations Copyright 2007 Pearson AddisonWesley All rights reserved 1618 Essay questions Copynght 2007 Peavson Addwsoeres ey AH thts vesevved 1619 Kindleberger What to do about Crises A Mike Ch7 Kyle Ch 8 Copynght 2007 Peavson Addwsoeres ey AH thts vesevved 1620
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