Transcript Chapter 23

Chapter 23
Monetary Policy,
Output, and Inflation
in the Short Run
McGraw-Hill/Irwin
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
Japanese and U.S. Growth and
Interest Rates, 1990–2004
23-2
Japanese and U.S. Growth and
Interest Rates, 1990–2004
23-3
Japanese and U.S. Growth and
Interest Rates, 1990–2004
23-4
Japanese and U.S. Growth and
Interest Rates, 1990–2004
23-5
The Monetary Policy Transmission
Mechanism
• The Traditional Channels: Interest Rates
and Exchange Rates
• the traditional channels of monetary policy
transmission aren’t very powerful
23-6
The Monetary Policy Transmission
Mechanism
• Asset Price Channels: Investment and
Wealth
• a fall in the interest rate tends to push stock
prices up
• A fall in interest rate target it drives the
mortgage rate down leading to higher demand
for residential housing, driving up the prices of
existing homes
• Higher asset prices mean increased
wealth and higher consumption
23-7
The Monetary Policy Transmission
Mechanism
• Bank Lending and Balance Sheet Channels
• By altering the supply of funds to the banking system,
policymakers can affect banks' ability and willingness
to lend.
• an open market purchase has a direct impact on the
supply of loans, increasing their availability to those
who depend on banks for financing.
• as interest rates fall, the supply of loans increases
23-8
The Monetary Policy Transmission
Mechanism
23-9
The Challenges Modern Monetary
Policymakers Face
Estimating Potential GDP
23-10
The Challenges Modern Monetary
Policymakers Face
U.S. Inflation, 1960–1980
23-11
The Challenges Modern Monetary
Policymakers Face
23-12
The Challenges Modern Monetary
Policymakers Face
• Deflation and the Zero Nominal Interest
Rate Bound
• Since nominal interest rates can't fall below
zero, this places a significant restriction on
what monetary policymakers can do
• The most effective way to expand the
monetary base when the overnight interest
rate has fallen to zero is to shift to targeting
longer-term rates.
23-13
The Challenges Modern Monetary
Policymakers Face
• Booms and Busts in Equity and Property
Prices
• Bubbles that inflate and then burst are
particularly damaging, because the wealth
effects they create cause consumption to
explode and then contract just as rapidly.
23-14
The Challenges Modern Monetary
Policymakers Face
23-15
The Challenges Modern Monetary
Policymakers Face
• The Evolving Structure of the Financial
System
• changes in financial structure will change the
impact of monetary policy.
23-16
The Challenges Modern Monetary
Policymakers Face
23-17
Chapter 23
End of Chapter
McGraw-Hill/Irwin
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.