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Monetary Policy

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  • Benjamin M. Friedman

Abstract

Monetary policy is one of the two principal means (the other being fiscal policy) by which government authorities in a market economy regularly influence the pace and direction of overall economic activity, importantly including not only the level of aggregate output and employment but also the general rate at which prices rise or fall. The ability of central banks to carry out monetary policy stems from their monopoly position as suppliers of their own liabilities, which banks in turn need (either as legally required reserves or as balances for settling interbank claims) in order to create the money and credit used in everyday economic transactions. Important developments both in research and in the actual conduct of monetary policy in recent decades have revolved around the choice of a short-term interest rate versus a reserve quantity as the central bank's direct operating instrument, whether to use some measure of money as an intermediate target, whether to constrain the central bank to follow some fairly simple policy rule, what degree of political independence a central bank should have, and whether to target inflation. Some key areas of ongoing research in this area, as of the beginning of the 21st century, are whether the behavioral process by which monetary policy affects nonfinancial economic activity centers more on money or on credit, quantitative measurement of whatever is the mechanism at work, the trade-off between price inflation and real aspects of economic activity like output and employment, and just why it is that the public in most industrialized countries is as averse to inflation as is apparently the case.

Suggested Citation

  • Benjamin M. Friedman, 2000. "Monetary Policy," NBER Working Papers 8057, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8057 Note: ME
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Stanislaw Gomulka, 2001. "Poland's Road to Euro: A Review of Options," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 3.
    2. Alfred Janc & Michal Jurek & Pawel Marszalek, 2013. "Studies in Financial Systems No 7 Financial System in Poland," FESSUD studies fstudy07, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    3. Efrem Castelnuovo, 2002. "Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model," Macroeconomics 0211006, EconWPA.
    4. Cleomar Gomes & Márcio Holland, 2003. "Regra de Taylor e política monetária em condições de endividamento público no Brasil," Economia, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics], pages 333-361.
    5. Efrem Castelnuovo, 2003. "Taylor Rules and Interest Rate Smoothing in the US and EMU," Macroeconomics 0303002, EconWPA.
    6. Pobre, Mervin L., 2004. "An Analysis of the Monetary Transmission Mechanism in East Asia," Philippine Journal of Development PJD 2003 Vol. XXX No. 2-d, Philippine Institute for Development Studies.
    7. Duoguang Bei & Xiaoli Zhu, 2008. "A new monetary phenomenon: An analysis of the co-existence of the external appreciation and the domestic inflation of RMB," Psychometrika, Springer;The Psychometric Society, vol. 3(3), pages 327-355, September.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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