宏观经济学 教案Chapter09.docx

CHAPTER 9POLICY PREVIEWChapter Outline Monetary policy and the Fed Short-run policy goals The Taylor rule Interest rates and aggregate demand Open-loop and closed-loop controlChanges from the Previous EditionThe material in this chapter was in old Chapter 8. Almost all of the material has been kept intact.Introduction to the MaterialBoth fiscal and monetary policy changes can be implemented when the government decides that action is needed to stabilize the economy. However, over the two decades prior to the recession of 2007-09, most policy measures designed to keep the U.S. economy on course were monetary policy changes initiated by the Federal Open Market Committee (FOMC) of the U.S. Fed. The FOMC is comprised of the Fed's seven-member Board of Governors plus five of the twelve Federal Reserve Bank presidents. The Chair of the Board of Governors presides over FOMC meetings and has the most influence in the decision-making process. Members of the FOMC who favor a low rate of inflation are often called "hawks," while members who favor a low rate of unemployment are referred to as “doves.”While monetary policy can influence economic activity in the short run, it can only affect the rate of inflation in the long run. Central banks conduct monetary policy by influencing shortterm interest rates with the goal of achieving a high level of economic activity with a low level of inflation. In the U.S., the Fed currently does this by announcing a federal funds rate target. The target is set based on current economic conditions but also with an eye on possible future conditions. The Fed attempts to achieve the target through open market operations, that is, the buying and selling of Treasury bills.While the Fed does not follow a fixed rule in setting the federal funds rate, the actual behavior of the federal funds rate over the last few decades closely follows the predictions of the so-called Taylor rule, first advocated by John B. Taylor of Stanford University (see What More Do We Know? Box 9-2). This rule recommends that the Fed raise the federal funds rate by 1.5 percent if the inflation rate increases by 1 percent above a certain target inflation rate and that the federal funds rate should be raised by 0.5 percent if the GDP-gap increases by 1 percent. Some central banks have specific inflation targets; the U.S. Fed opts instead for some flexibility on monetary policy, since inflation targeting limits its ability to respond to fluctuations in the unemployment rate.Equation 9-2 shows that the Fed can influence aggregate demand by changing interest rates. More specifically, expansionary monetary policy, that is, open market purchases by the Fed, willlower interest rates. This will increase spending on investment and durable consumption, thus shifting the AD-curve to the right. Output and the price level both increase in the short run; however, in the long run, output returns to the full-employment level. Thus in the long run only the price level is affected.When implementing policy changes, decision makers often face significant uncertainty about how these changes will affect key variables but they generally have a fairly good sense of whether the effects will be large or small. The main focus of short-run policy measures tends to be their effect on aggregate demand.Suggestions for LecturingMany students have little understanding of how choices among economic policy options are made, how policy measures are implemented, or what determines their timing. Many don't know how policy decisions are made within the Fed and are even unable to name of the chair of the Fed's Board of Governors. This chapter provides an opportunity to discuss how a central bank may set interest rates at a certain level in an effort to influence aggregate demand and achieve monetary policy goals. It also gives instructors a chance to make students aware that presidents may need to work with Fed chairs that they have not themselves selected because of the timing of the selection process. It is obviously worth noting that in 2013, President Obama nominated Janet Yellen to succeed Ben Bernanke as the chair of the Board of Governors, the first woman ever to hold this powerful position. She will start her job in January 2014, when Ben Bernanke will step down.Instructors may want to point out that while aggregate demand can be shifted by fiscal as well as monetary policy, most short-run policy adjustments over the last few decades have been made through monetary policy changes. These changes have tended to be fairly cautionary in nature and they most often involved changes in short-term interest rates through open market operations, the traditional means for monetary policy. However, in contrast, to get the economy out of the Great Recession of 2007-09, the government not only implemented a massive fiscal stimulus package (since short-term interest rates had already been lowered to close to zero percent), but the Fed also employed far-reaching and, non-traditional policy measures. Since later chapters will explore in more detail the options that a central bank has at its disposal to influence economic activity, instructors may want to wait to explore this subject extensively and give students here only a brief overview of how monetary policy changes are implemented in practical terms. Students should have already learned in their introductory macroeconomics courses that a central bank conducts its monetary policy by influencing interest rates and that interest rate changes affect aggregate demand through changes in investment spending or the consumption of durable goods. But students may not recall exactly how a central bank can implement these changes.It is important for students to know that in the U.S. most monetary policy decisions are voted on in meetings of the Federal Open Market Committee (FOMC). While the chair of the Board of Governors of the Federal Reserve System has only one vote, the views of the chair generally carry the most weight in the debate preceding a policy decision. Nonetheless, in these debates there is often an open exchange of opinions between the so-called "hawks," who tend to favor a low inflation target, and the so-called ndoves/ who tend to favor a full-employment target. Thisis not necessarily the case in other countries, where policy decisions are made largely by the head of the central bank. Similarly, while the U.S. Fed is fairly independent from the administration, the governments of some other countries have much more influence over the actions of their central banks.Many economists, among them Ben Bernanke, chair of the Fed's board from 2006 until 2013, feel that more openness about the way monetary policy is conducted is essential to its ultimate success. The need for transparency in the Fed's actions came to the forefront after 2008, as many questioned the non-traditional measures that the Fed implemented in response to the financial crisis and the subsequent severe recession. However, instructors may choose to wait to address this issue until the material in Chapter 17 is discussed. In either case, it should be mentioned in the discussion that opinions on whether there is a need for greater transparency in the Fed's deliberations and actions vary greatly. In the past, deliberations of the FOMC were withheld from the public for several weeks in order to avoid upsetting financial markets. Currently the full minutes of an FOMC meeting are not revealed until the next meeting, held six weeks later, but a statement is issued to give advance notice of the Fed's thinking and to avoid too much speculation in financial markets. Fed officials tend to be very careful in statements made to the public. Alan Greenspan, the chair of the Fed's board before Bernanke, was a master at using language that would not give away too much about the Fed's plans for the future.Nowadays, the Fed announces a target for the federal funds rate, that is, the interest rate that banks charge when one bank borrows from another. Students often confuse this rate with the discount rate, that is, the interest rate that the Fed charges a bank which borrows funds from it. The name "federal funds rate" tends to suggest to them that this is the rate that the Fed charges. Instructors therefore need to make sure that students know the difference between the two. It can also be mentioned that the Fed used to signal a change in monetary policy by announcing a change in the discount rate. It now, however, indicates monetary policy changes by announcing a change in the federal funds rate target. The discussion of the reasons for this change should probably be postponed until later chapters, when students should have a better understanding of the workings of the Fed. Similarly, a detailed discussion of the transmission process, that is, the way in which monetary policy affects the economy, should also be postponed until later to allow students to gain a better understanding of the workings of the economy.Chapter 9 mentions two short-run goals of a central bank, namely, to keep economic activity high and to keep inflation low. Yet, as we will learn later, other policy goals also may come into play and instructors may want to point out that most often it is not possible to achieve these goals simultaneously. Since this chapter only attempts to familiarize students with the basics of how and why a central bank sets interest rates, it suffices to mention here that there is a conflict between the short run and the long run. In other words, a central bank can use monetary policy to stimulate economic activity in the short run, but has to weigh the advantages of such action against the risk that this may cause more inflation in the long run. As short-run policy changes tend to focus on aggregate demand, we most often have to consider the short-run trade-off between unemployment and inflation.Policy makers have to make decisions under a great deal of uncertainty, as they never know how the public will respond to a particular policy change. Thus policy makes cannot be sure of the magnitude of the impact of a policy change on the economy. Unless extraordinary circumstances warrant it, central banks tend to proceed fairly cautiously when implementingpolicy changes. One of the approaches central banks can take in responding to changes in either economic activity or the inflation rate is best summarized by the Taylor rule. This rule provides feedback to policy makers on how to adjust the federal funds rate in response to economic activity, in particular the output gap and the inflation rate. Unfortunately, the long lags involved in conducting monetary policy still make it very difficult for a central bank to consistently and successfully stabilize the economy, which is why policy changes are most often made in modest initial steps followed by frequent readjustments.To cite examples for monetary policy changes, instructors may want to mention that the U.S. Fed lowered the discount rate 15 times in small steps during the recession of 1991, without achieving the goal of significantly stimulating the economy. When the economy entered its next recession in 2001, the Fed lowered interest rates much more aggressively and achieved a much greater positive effect. However, when fears arose that the financial crisis that started in 2008 could lead to a complete breakdown of the financial system and a major world-wide recession, the Fed not only had to lower interest rates even more drastically but also had to employ many new measures that led to a large increase in the Fed's asset holdings.Monetary policy affects economic activity primarily though interest rates and therefore through changes in investment and durable consumption. These types of spending as well as the exact channels through which monetary policy can affect the economy are discussed in greater depth in later chapters. Without going into too much detail, instructors nevertheless should stress that interest rates are an important link between the monetary sector and the expenditure sector and that a central bank has the ability to achieve certain policy goals by manipulating interest rates through the conduct of its monetary policy.Additional ReadingsBernanke, BenInflation Targeting/9 Review, FRB of St. Louis, July/August, 2004.Bernanke, B.，et. aL, “Missing the Mark: The Truth about Inflation Targeting/5 Foreign Affairs, September/October, 1999.Bernanke, B. and Mishkin, F.? "Inflation Targeting: A New Framework for Monetary Policy?” Journal of Economic Perspectives, Spring, 1997.Blinder, Alan, “Central Banking in a Democracy/5 Economic Quarterly. FRB of Atlanta, Fall, 1996.Bullard, James, "Three Lessons for Monetary Policy from the Panic of 2008/' Review, FRB of St. Louis, May/June, 2010.Cogley, Timothy, "Why Central Bank Independence Helps to Mitigate Inflationary Bias J Economic Letter. FRB of San Francisco, May, 1997.Feldstein, Martin, "Liquidity Now!" The Wall Street Journal, September 12, 2007.Greenspan, Alan, “Risk and Uncertainty in Monetary Policy J American Economic Review, May, 2004.Judd, J. and Rudebusch, G.Taylor's Rule and the Fed: 1970-1997Review. FRB of San Francisco, 1998.Koenig, Evan Jis the Fed Slave to a Defunct Economist?" Southwest Economy. FRB of Dallas, September/October, 1997Mankiw, Gregory, nQuestions about Fiscal Policy: Implications from the Financial Crisis of 2008-2009," Review, FRB of St. Louis, May/June, 2010.Meyer, Laurence, "Inflation Targets and Inflation Targeting/9 Review, FRB of St. Louis, November/December, 2001.Mishkin, Frederic, “What Should Central Banks Do?" Review. FRB of St. Louis, November/December, 2000.Neely, Christopher, "The Federal Reserve Responds to Crises: September 11th Was Not the First J Review. FRB of St. Louis, March/April, 2004.Poole, William, "Inflation Targeting/9 Review, FRB of St. Louis, May/June, 2006.Poole, William, "How Predictable is the Fed," Review, FRB of St. Louis, November/December, 2005.Taylor, John, "Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis/* Review. FRB of St. Louis, May/June, 2010.Learning ObjectivesStudents should be aware that, in practice, short-term macroeconomic stabilization policy is implemented by the central bank primarily through its manipulation of short-term interest rates. Students should know that the Fed has a tendency to be fairly cautionary in conducting its monetary policy, unless unusual circumstances dictate otherwise. Students should be familiar with the fact that monetary policy affects the economy by changing interest rates which will affect aggregate demand, in particular, investment spending and spending on durable goods. Students should know that in many cases a central bank has to decide on either a desired level of inflation or a desired level of output and that achieving both goals