FILE: 252N11.HTML
FALL 2005
MONETARY POLICY CH
15
REVIEW QUIZ
FEDERAL FUNDS MARKET 4.00 PCT TARGET/NOVEMBER 2005
RATE
DETERMINATION
SUPPLY
DEMAND
PORTFOLIO
MANAGEMENT
EFFECT
OF INCREASED OPEN MARKET PURCHASE
EFFECT
OF REDUCED OPEN MARKET PURCHASE
USE TOOLS TO MEET OBJECTIVES
ACTIVE
TOOLS
OPEN
MARKET PURCHASES
INACTIVE
TOOLS (NOT USED)
OPEN
MARKET SALES
DISCOUNT
RATE MANAGEMENT (AS OF JAN03)
RESERVE
REQUIREMENT (AS OF 1937)
ONLY
ONE ACTIVE TOOL
INTERMEDIATE GOALS
INTEREST
RATES
MONEY
SUPPLY
USE
THESE TO SEE IF
YOU
ARE HEADED IN THE RIGHT DIRECTION
WHAT
IF THEY CONFLICT?
ONLY ONE ACTIVE TOOL, TOO MANY
OBJECTIVES
ULTIMATE OBJECTIVES OF MONETARY POLICY
GDP
AND TARGET RATE OF GROWTH
JOBS
AND TARGET RATE OF UNEMPLOYMENT
TARGET
RATE OF INFLATION/NO DEFLATION/BERNANKE
“STRONG
AND STABLE” DOLLAR/EXCHANGE RATE
MANAGEMENT
WHAT
IF THEY CONFLICT?
ONLY ONE ACTIVE TOOL, TOO MANY
OBJECTIVES
MONEY MARKET MADNESS
DEMAND FOR MONEY
LIQUIDITY
PREFERENCE
L
= f(R)
TRANSACTIONS
PRECAUTIONARY
SPECULATIVE(ASSET)
SUPPLY OF MONEY
IS
IT PERFECTLY INELASTIC?
HOW
MUCH CONTROL BY THE FED?
DOES
IT MATTER?
MONEY MARKET
EQUILIBRIUM
PROBLEMS
LONG
TERM RATES VS SHORT TERM RATES
SOMETIMES
OPPOSITE DIRECTIONS
LIQUIDITY
TRAP
BOND MARKET/MONEY MARKET INTERACTION
GOOD
EXAM QUESTIONS
EFFECTS
OF INCREASED L
ON
MONEY MARKET
ON
BOND MARKET
ON
INTEREST RATES AND BOND PRICES
EFFECTS
OF INCREASED M
ON
MONEY MARKET
ON
BOND MARKET
ON
INTEREST RATES AND BOND PRICES
EFFECTS
OF INCREASED INCOME (GDP)
ON
MONEY MARKET
ON
BOND MARKET
ON
INTEREST RATES AND BOND PRICES
EFFECTS
OF INCREASED PRICES (INFLATION)
ON
MONEY MARKET
ON
BOND MARKET
ON
INTEREST RATES AND BOND PRICES
LINK MONETARY OPERATIONS TO THE ECONOMY
1. INTEREST RATES AND INVESTMENT
INTEREST
RATES => INVESTMENT =>AGGREGATE DEMAND =>GDP
INVESTMENT FUNCTION
INVESTMENT
AS A FUNCTION OF INTEREST RATES
INDIVIDUAL
FIRMS INTERESTED IN PROFIT
FIRMS
NOT INTERESTED IN EQUILIBRIUM GDP
INVESTMENT
RELATED TO LONGER TERM INTEREST RATES
FED
AFFECTS SHORT TERM RATES
WILLING
LENDER
WILLING
BORROWER
MOVEMENT
VS SHIFTS: REASONS
EXPECTATIONS
2. INTEREST RATES AND
CONSUMER SPENDING
WILLING
LENDER
WILLING
BORROWER
MOVEMENT
VS SHIFTS: REASONS
EXPECTATIONS
MONETARIST PERSPECTIVE
EQUATION OF EXCHANGE
MV = PQ
VELOCITY
OF MONEY
DEFINE
VELOCITY
IS
VELOCITY STABLE?/ PAGE 319, YOUR CALL
IS VELOCITY PREDICTABLE?
EQUATION
OF EXCHANGE
BOTH
PRODUCTS EQUAL SALES
IS
THERE A NATURAL RATE OF GROWTH?
GROWTH
+ INFLATION = GROWTH OF M + GROWTH OF VELOCITY
VELOCITY
IS INSTITUTIONAL
BUT
INFLUENCED BY INFLATION
EFFECTS
OF MONETARY STIMULUS
HARD
TO PREDICT
IMPOSSIBLE
TO CONTROL
REAL VS NOMINAL INTEREST RATES
REAL
= NOMINAL - EXPECTED RATE OF INFLATION
DOES
THE REAL RATE CHANGE?
MONETARIST POLICY PERSPECTIVE
CROWDING
OUT BY GOVERNMENT
SHORT
TERM VS LONG TERM EFFECTS
6
MONTH LAG
MONETARY RULE (FRIEDMAN)
IGNORE
SHORT RUN CONDITIONS
FIXED
GROWTH OF MONEY AT 2.5 TO 3.0%
DEPENDS
ON ESTIMATING V AND Q
IS
THE NATURAL RATE OF GROWTH STABLE?
WHAT
ARE THE EFFECTS OF ERRORS?
FRIEDMAN'S VIEW OF COUNTER CYCLICAL POLICY
MORE
HARM THAN GOOD
MINOR(?)
PROBLEM: WHICH MEASURE OF MONEY SUPPLY?
M1
V M2 V M3
MONETARY STRATEGIES/ALTERNATIVE VIEWPOINTS
INTEREST RATE GUIDE
WHICH
INTEREST RATE?
DM
OR DL? DO YOU CORRECT PAST ERRORS?
CONTROL
R UNSTABLE M
CONTROL
M UNSTABLE R
R =>
I => GDP
GOLDEN RULE FOR PRICE STABILITY (GOLD STANDARD)
SHOULD
WE FIX THE PRICE OF GOLD?
IS
THE FED ON A GOLD STANDARD NOW?
WHO
CONTROLS WORLD'S SUPPLY OF GOLD?
HAS
IT WORKED IN THE PAST?
YES
AND NO
COMMODITY STANDARD
WHICH
COMMODITIES? WHY NOT ICE CREAM CONES?
20
YEARS TOO LATE
US
IS INTO SERVICES NOT MANUFACTURING
FOREIGN EXCHANGE STANDARD
WHICH
CURRENCIES?
POLITICAL
REALITIES
SO WHAT DOES MR. GREENSPAN USE?
MOSTLY
A FEDERAL FUNDS RATE TARGET
AN
ECLECTIC APPROACH
PAINTING
THE BARN DOOR