Download - Chapter 15. Monetary Policy
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Chapter 15. Monetary Policy
Link to syllabus
We may look briefly at the Appendix of this chapter.
and Monetarism, pp. 532-34
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The Money Demand Curve, Figure 15-1 p. 450.
Demand for money depends on nominal income, banking technology, government regulations, opportunity cost of holding money.
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Fig 15-3, p. 454. Equilibrium in the Money Market
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Fig 15-4 p. 455. The Effect on the Interest Rate of an Increase in the Money Supply
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Figure 15-7 p. 459. Monetary Policy and AD
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Reserve Requirements 2006.
(different textbook)
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The Fed Reverses Course (in 2007). Fig. 15-6, p. 497
Tightening monetary policy until late 2006, rapid expansion in late 2007. It’s stayed there since.
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The prime interest rate and the Federal funds rate
Link to data from the Minneapolis Fed
NY Times March 19, 2008
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Yields on CD’s at my
bank, March 2007
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More Yield Curves
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Link to Dynamic Yield Curve
http://stockcharts.com/charts/YieldCurve.html
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Tracking Monetary Policy. Figure 15-8, p. 460.
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Fig 15-9, p. 461. Taylor Rule and Federal Funds Rate
Taylor Rule: Federal Funds R=2.07 + 1.28* inflation – 1.95 * Unemp.gap. p. 460
Taylor Rule: interest rate = 1 + 1.5*inflation + 0.5 (Output gap) [previous edition p. 429]
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Short Run and Long Run Effects of an Increase in M Figure 15-11, p. 464
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The Long Run Determination of the Interest Rate. Figure 15-12 p. 466
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The Long Relation between Money and Inflation. Figure 15-13 p. 467
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Short Run Determination of the Interest Rate: Liquidity Preference and Loanable Funds
Figure 15a-1, page 473
From the Appendix: shows that the two models give consistent answers.Pursuit of this topic is for upper division courses. Not covered in Ec 201.
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Monetarism (pages 532-34)
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Milton Friedman, 1912-2006
Consumption function, Floating Exchange Rates, Monetary History of the U.S., Monetary Policy RuleLink to Friedman’s bio http://www.hoover.org/bios/friedman
Most prominent advocate ofa return to free market/non-governmental policies.
Influence concretized underPresident Reagan.
Also: leading ‘monetarist’ anda Nobel Prize winner.
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Figure 18.4 page 533 Fiscal Policy with a Fixed Money Supply: (Crowding out analysis, repeated)
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Equation of Exchange, a.k.a. Velocity equation
M x V = P x Y
where M is the quantity of money,V is velocity of circulationP is the price indexY is real GDP
(Equation 18-1 page 533)
Implication: If M increases and V and Y are constant, then P rises.
“Inflation is always and everywhere a monetary phenomenon.”
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Figure 18.5 page 534. The Velocity of Money (M1)
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Comparisons of Velocities of M
DifferentText.
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Monetary Growth Rule i
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Monetary Growth Rule ii
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“If monetary policy is like driving a car, then the car is one that has an unreliable speedometer, a foggy windshield and a tendency to respond unpredictably.“
Ben Bernanke. 2002 – pre-Fed days.