Chapter 18. Conduct of Monetary Policy.ppt

Chapter 18. Conduct of Monetary Policy Goals of monetary policy Using targets A History of monetary policy Policy Rules I. Goals desirable goals for the economy Fed uses monetary policy to achieve these goals directly control tools, to influence goals High employment i.e., low unemployment federal government has a commitment to full employment goal: natural rate of unemployment about 4-5% today: 5.1% (3/05) 7.7% in Oswego Co. Economic Growth annual % change in real GDP U.S. long run average -- 3% 2004 GDP growth 4.4% Price stability i.e., low inflation annual % change in CPI primary goal of Fed since 1980s how high is too high? over 4% goal: 2% or less 2004 tradeoff between price stability economic growth controlling inflation can mean slowing down economic growth Financial Market Stability stability of financial institutions stability of interest rates stability of exchange rates Fed stabilized markets October 1987 Summer 1998 September 2001 II. Using targets Fed directly controls tools (like OMO), not goals it can take a year for tools to impact the goals how to gauge progress in between? Targets related to tools and goals used by Fed to judge if they are on track operating targets respond immediately to changes in the tools examples bank reserves FF rate Tbill rate intermediate targets affected by operating target closely associated with goals examples M1, M2 or M3 prime rate Tnote or Tbond yields example Fed wants 5% nominal GDP growth intermediate target 4% M2 growth operating target 3% MB growth conduct open market purchases to increase MB by 3% effective targets frequently and accurately measured controllable by the Fed predictably related to goals 2 types of targets monetary targets reserves, MB M1, M2, or M3 interest rate targets FF rate other short or medium-term rates target tradeoff Fed can target money supply OR interest rates NOT BOTH! why? suppose Fed targets M* for MS: but as MD fluctuates, i will change: so if target M*, lose control o