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.
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References listed on IDEAS
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- 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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- Chadha, Jagjit S. & Nolan, Charles, 2007.
"Optimal simple rules for the conduct of monetary and fiscal policy,"
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Elsevier, vol. 29(4), pages 665-689, December.
- 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.
- 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.
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"Monetary Policy Analysis in Models Without Money,"
NBER Working Papers
8174, National Bureau of Economic Research, Inc.
- 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.
- 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.
- 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 473-91, June.
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American Economic Association, vol. 78(3), pages 307-17, June.
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