Monetary POLICY GOALS, STRATEGY, and TACTICS

--(Note: In the 9th edition, this chapter is the same number—Mish9ed_c16...)

-text material, pages: 393-417

-Questions at end of chapter: 418

=========================================================

NOTES

-‘Nominal Anchor’ –Economists’ jargon for choosing a monetary variable (like money supply, inflation, interest rates) for the GOAL of monetary policy (either explicitly (publicly announced) orimplicitly (not announced publicly)

-‘Time-inconsistency problem’-Economists’ jargon in this area of the idea that a short run policy not necessarily being a good long run policy. This is just a truism…i.e. simple idea that doing something once can be o.k. but doing it all the time may not. {This idea is most frequently mentioned by free-market optimistic economists who argue that the government should not really try and achieve full employment and rapid economic growth in the short run since it can lead to problems (like inflation). }

=============================================================

pp.398-401

MONETARY TARGETING —COUNTRY CASE STUDIES

{Rock: Note—Mishkin fails to discuss almost at all the significant differences among the economies he uses for case studies. I am not sure if this is willful ignorance or he just does not think they are relevant. For social democratic welfare state economies and their advocates they are crucial: They argue that monetary policy will have quite different effects over time in economies with significantly different institutional structures and political economies (i.e. the nature of their type of capitalism).}

-(I)United States

---Fed began to announce publicly targets for money supply growth in 1975.

---Paul Volker (1979) focused more in nonborrowed reserves

---Greenspan announced in July 1993 that the Fed would not use any monetary aggregates as a guide for conducting monetary policy

-(II Japan

---In 1978 the Bank of Japan began to announce “forecasts” for M2 + CDs

---Bank of Japan’s monetary performance was much better than the Fed’s during 1978-1987.

---Real Estate bubble and then austerity and then public infrastructure spending to try and get out of the hole caused by bubble bursting, financial institutions withdrawing from much business development lending and also forced opening, suddenly of their domestic market to capital movements, etc.

---In 1989 the Bank of Japan switched to a tighter monetary policy and was partially blamed for the “lost decade”

-(III) Germany

---The Bundesbank focused on “central bank money” in the early 1970s.

---A monetary targeting regime can restrain inflation in the longer run, even when targets are missed.

---The reason of the relative success despite missing targets relies on clearly stated monetary policy objectives and central bank engagement in communication with the public.

---German economy: highly planned and managed capitalism with coordinated business sector and strong unions and high compensation packages for lifetime economic security and high human capital investments as well. More tolerant of restrictive monetary policy since any costs are highly socialized.

MONETARY TARGETING-- ADVANTAGES & DISADVANTAGES

-Advantages

-------Flexible

------Almost immediate signals help fix inflation expectations and produce less inflation

------Almost immediate accountability

-Disadvantages

------Must be a strong and reliable relationship between the goal variable and the targeted monetary aggregate

=============================================================

pp.402-407

*INFLATION TARGETING—GENERAL ASPECTS

-Public announcement of medium-term numerical target for inflation

-Institutional commitment to price stability as the primary, long-run goal of monetary policy and a commitment to achieve the inflation goal