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Monetary Policy Analysis: An Undergraduate Toolkit

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  • Jagjit S. Chadha

Abstract

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.

Suggested Citation

  • Jagjit S. Chadha, 2008. "Monetary Policy Analysis: An Undergraduate Toolkit," Studies in Economics 0815, School of Economics, University of Kent.
    • Handle: RePEc:ukc:ukcedp:0815
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    References listed on IDEAS

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    1. Fuente,Angel de la, 2000. "Mathematical Methods and Models for Economists," Cambridge Books, Cambridge University Press, number 9780521585293, October.
    2. Feldstein, Martin S, 1979. "The Welfare Cost of Permanent Inflation and Optimal Short-Run Economic Policy," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 749-768, August.
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    5. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
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    8. Chadha, J.S. & Corrado, L., 2007. "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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    11. Chadha, Jagjit S. & Nolan, Charles, 2007. "Optimal simple rules for the conduct of monetary and fiscal policy," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 665-689, December.
    12. Bennett T. McCallum, 2001. "Monetary policy analysis in models without money," Review, Federal Reserve Bank of St. Louis, vol. 83(Jul), pages 145-164.
    13. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
    14. Jagjit S. Chadha & Luisa Corrado, 2006. "On the Determinacy of Monetary Policy under Expectational Errors," CDMA Working Paper Series 200603, Centre for Dynamic Macroeconomic Analysis, revised 15 Apr 2007.
    15. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Deflation - a real problem and a possible cure
      by Jagjit S. Chadha in Jagjit Chadha's Macro View Point on 2009-01-09 02:59:00
    2. Orthodox and Heterodox Monetary Policies
      by Jagjit S. Chadha in Jagjit Chadha's Macro View Point on 2009-01-14 05:36:00

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    Cited by:

    1. Imamudin Yuliadi, 2020. "The Implementation of a Dual Monetary System in Indonesia," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(3), pages 28-39.

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    More about this item

    Keywords

    Interest rate setting; monetary policy; zero-bound; money markets;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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