Monetary Policy Analysis: An Undergraduate Toolkit
We develop simple diagrams that can be used by undergraduates to understand interest rate setting by policy- makers. We combine an inflation target, Fisher equation, policy reaction function and short and long run aggregate supply analysis to give a depiction of the policy problem. We illustrate the appropriate response by the policy maker to each of a positive shock to demand, a negative supply shock and dislodged inflation expectations. We also illustrate the problems of a zero bound for policy rates within this framework and consider the role of an interest rate rule in offsetting money market perturbations. Some key readings are introduced.
|Date of creation:||Nov 2008|
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8174, National Bureau of Economic Research, Inc.
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"On the Determinacy of Monetary Policy under Expectational Errors,"
Cambridge Working Papers in Economics
0722, Faculty of Economics, University of Cambridge.
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"Optimal Simple Rules for the Conduct of Monetary and Fiscal Policy,"
CDMA Working Paper Series
200406, Centre for Dynamic Macroeconomic Analysis.
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"Reconnecting Money to Inflation: The Role of the External Finance Premium,"
Studies in Economics
0816, School of Economics, University of Kent.
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