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|
|Contact details of provider:|| Postal: School of Economics, University of Kent, Canterbury, Kent, CT2 7NP|
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References listed on IDEAS
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- Lucas, Robert E, Jr, 1996. "Nobel Lecture: Monetary Neutrality," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 661-682, August.
- Chadha, J.S. & Corrado, L. & Holly, S., 2008.
"Reconnecting Money to Inflation: The Role of the External Finance Premium,"
Cambridge Working Papers in Economics
0852, Faculty of Economics, University of Cambridge.
- Jagjit S. Chadha & Luisa Corrado & Sean Holly, 2008. "Reconnecting Money to Inflation: The Role of the External Finance Premium," Studies in Economics 0816, School of Economics, University of Kent.
- 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.
- 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.
- Chadha, J.S. & Charles Nolan, 2002. "Optimal Simple Rules for the Conduct of Monetary and Fiscal Policy," Cambridge Working Papers in Economics 0224, Faculty of Economics, University of Cambridge.
- Jagjit S. Chadha & Charles Nolan, 2004. "Optimal Simple Rules for the Conduct of Monetary and Fiscal Policy," CDMA Working Paper Series 200406, Centre for Dynamic Macroeconomic Analysis.
- Solow, Robert M, 1988. "Growth Theory and After," American Economic Review, American Economic Association, vol. 78(3), pages 307-317, June.
- Solow, Robert M., 1987. "Growth Theory and After," Nobel Prize in Economics documents 1987-1, Nobel Prize Committee.
- Bennett T. McCallum, 2001. "Monetary policy analysis in models without money," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 145-164.
- Bennett T. McCallum, 2001. "Monetary Policy Analysis in Models Without Money," NBER Working Papers 8174, National Bureau of Economic Research, Inc.
- Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
- 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.
- 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.
- 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.
- 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. Full references (including those not matched with items on IDEAS)
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