Chapter 15. Monetary Policy

Link to syllabus

We may look briefly at the Appendix of this chapter.

and Monetarism, pp. 532-34

The Money Demand Curve, Figure 15-1 p. 450.

Demand for money depends on nominal income, banking technology, government regulations, opportunity cost of holding money.

Fig 15-3, p. 454. Equilibrium in the Money Market

Fig 15-4 p. 455. The Effect on the Interest Rate of an Increase in the Money Supply

Figure 15-7 p. 459. Monetary Policy and AD

Reserve Requirements 2006.

(different textbook)

The Fed Reverses Course (in 2007). Fig. 15-6, p. 497

Tightening monetary policy until late 2006, rapid expansion in late 2007. It’s stayed there since.

The prime interest rate and the Federal funds rate

Link to data from the Minneapolis Fed

NY Times March 19, 2008

Yields on CD’s at my

bank, March 2007

More Yield Curves

Link to Dynamic Yield Curve

http://stockcharts.com/charts/YieldCurve.html

Tracking Monetary Policy. Figure 15-8, p. 460.

Fig 15-9, p. 461. Taylor Rule and Federal Funds Rate

Taylor Rule: Federal Funds R=2.07 + 1.28* inflation – 1.95 * Unemp.gap. p. 460

Taylor Rule: interest rate = 1 + 1.5*inflation + 0.5 (Output gap) [previous edition p. 429]

Short Run and Long Run Effects of an Increase in M Figure 15-11, p. 464

The Long Run Determination of the Interest Rate. Figure 15-12 p. 466

The Long Relation between Money and Inflation. Figure 15-13 p. 467

Short Run Determination of the Interest Rate: Liquidity Preference and Loanable Funds

Figure 15a-1, page 473

From the Appendix: shows that the two models give consistent answers.Pursuit of this topic is for upper division courses. Not covered in Ec 201.

Monetarism (pages 532-34)

Milton Friedman, 1912-2006

Consumption function, Floating Exchange Rates, Monetary History of the U.S., Monetary Policy RuleLink to Friedman’s bio http://www.hoover.org/bios/friedman

Most prominent advocate ofa return to free market/non-governmental policies.

Influence concretized underPresident Reagan.

Also: leading ‘monetarist’ anda Nobel Prize winner.

Figure 18.4 page 533 Fiscal Policy with a Fixed Money Supply: (Crowding out analysis, repeated)

Equation of Exchange, a.k.a. Velocity equation

M x V = P x Y

where M is the quantity of money,V is velocity of circulationP is the price indexY is real GDP

(Equation 18-1 page 533)

Implication: If M increases and V and Y are constant, then P rises.

“Inflation is always and everywhere a monetary phenomenon.”

Figure 18.5 page 534. The Velocity of Money (M1)

Comparisons of Velocities of M

DifferentText.

Monetary Growth Rule i

Monetary Growth Rule ii

“If monetary policy is like driving a car, then the car is one that has an unreliable speedometer, a foggy windshield and a tendency to respond unpredictably.“

Ben Bernanke. 2002 – pre-Fed days.