Transcript Policy Goals, Targets, Tools

Goals of Monetary Policy
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Price stability
High employment
Economic growth
Financial market and institution stability
Interest rate stability
Foreign-exchange market stability
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Problems in Achieving Monetary
Policy Goals: Tools and Targets
The goals may not be simultaneously achievable.
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Lots of goals … just a few tools:
[Open market operations, discount rate, reserve requirements]
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These tools don’t let it achieve its goals directly.
Fed also has timing problem using its policy tools.
The Fed uses targets to achieve its goals
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Short-term interest rates
Monetary aggregates
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M1 growth, M2 growth
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Figure 21.1
Achieving Monetary Policy Goals
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Slide 21-3
Types of Targets
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Intermediate targets: financial variables that impact
economic behavior and help the Fed achieve its goals.
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Short-term interest rates
Monetary Aggregates: M1, M2
Operating targets: variables that the Fed controls directly
with monetary policy tools
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Fed funds rate, Nonborrowed reserves, Borrowed reserves
Operating targets must be closely related to intermediate
targets
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Fed funds rates  Short-term interest rates  Real rates ??
Nonborrowed reserves  M1 ???  Output and prices ???
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The Targeting Dilemma: Money Supply or
Interest Rates?
Money Supply Targeting and Interest Rate Fluctuations
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Slide 21-5
The Targeting Dilemma: Money Supply or
Interest Rates?
Interest Rate Targeting and Money Supply Fluctuations
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Slide 21-6
The Monetary Policy Record
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After 1951, short-term interest rates and free
reserves were intermediate targets.
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Free Reserves = Excess Reserves – Borrowed Reserves
In the 1970s, money was the intermediate target and
interest rate the operating target .
1979-1982 Volcker Disinflation: nonborrowed
reserves became the stated operating target.
After 1982, the Fed began to pay more attention to
the federal funds rate.
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The Monetary Policy Record
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Exchange rate changes shaped Fed policymaking more
during the 1980s and 1990s than before
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Plaza Accord, September 1985: Bring’n’ down dollar
Louvre Accord February 1987: Propp’n’ up dollar
 The bubble economy?
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Taylor’s Rule
Funds Rate Target = Inflation + Real Equil Fed Funds Rate
+ ½ {Inflation Gap} + ½ {Output Gap}
Inflation Targeting
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State and adhere to credible medium run inflation objective
Adjust in short run to stabilize output, financial markets,
exchange rate, etc.
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Fed Funds Rate and Money Supply
Growth Rate, 1979-2000
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Slide 21-9
Reevaluating Fed Targeting Policy
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Variables other than money may be useful as
indicators.
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Nominal GDP growth rate
Yield curve slope.
Commodity prices … unlikely to be good indicator.
Exchange rate movements … a useful indicator if
combined with others
Federal Funds Rate – Market Short Rate Spread
Quest for an automatic stabilizer
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