Monetary policy/Addendum: Difference between revisions
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==The Jackson Hole consensus== | |||
(Summarised from a speech by Charles Bean at the 2010 Jackson Hole Conference<ref> | |||
Charles Bean, Matthias Paustian, Adrian Penalver and Tim Taylor: ''Monetary Policy after the Fall'', Federal Reserve Bank of Kansas City Annual Conference | |||
Jackson Hole, Wyoming, 28 August 2010[http://www.bankofengland.co.uk/publications/speeches/2010/speech444.pdf]</ref>) | |||
* Discretionary fiscal policy is rejected as an instrument of demand management. | |||
* The principal economic policy instrument is to be monetary policy, operated by the management of short-term interest rates. | |||
* The monetary transmission mechanism operates mainly through longer-term interest rates, asset prices and expectations of future inflation. | |||
* The conduct of monetary policy is best delegated to an independent central bank. | |||
* The link between intermediate monetary targets and policy objectives is too unstable for their policy use. | |||
* Monetary action should instead be targetted directly on inflation, but with some "constrained discretion" towards the pursuit of output stability | |||
* Asset markets provide an efficient means of risk distribution and are not normally amenable to monetary policy action | |||
* Financial markets are generally well developed and well regulated, and systematic crises are therefore unlikely. | |||
==The Taylor rule== | ==The Taylor rule== | ||
The rule states that the real short-term interest rate (that is, the interest rate adjusted for inflation) should be determined according to three factors: | The rule states that the real short-term interest rate (that is, the interest rate adjusted for inflation) should be determined according to three factors: | ||
* where actual inflation is relative to the targeted level that the Fed wishes to achieve; | |||
* how far economic activity is above or below its "full employment" level; and, | |||
* what the level of the short-term interest rate is that would be consistent with full employment.<br> | |||
The rule recommends a relatively high interest rate (that is, a "tight" monetary policy) when inflation is above its target or when the economy is above its full employment level, and a relatively low interest rate ("easy" monetary policy) in the opposite situations. <ref>John B Taylor "Discretion versus Policy Rules in Practice", in ''Carnegie-Rochester Conference Series on Public Policy'' no 39 1993 [http://www.stanford.edu/~johntayl/Papers/Discretion.PDF John Taylor] </ref><ref>[http://www.stanford.edu/~johntayl/PolRulLink.htm Stanford University Monetary Policy Rule Homepage]</ref><ref>[http://mpra.ub.uni-muenchen.de/18309/1/MPRA_paper_18309.pdf Antonio Forte ''The European Central Bank, the Federal Reserve and the Bank of England: is the Taylor Rule an useful benchmark for the last decade?'', Munich Personal RePEc Archive, November 2009]</ref>. | The rule recommends a relatively high interest rate (that is, a "tight" monetary policy) when inflation is above its target or when the economy is above its full employment level, and a relatively low interest rate ("easy" monetary policy) in the opposite situations. <ref>John B Taylor "Discretion versus Policy Rules in Practice", in ''Carnegie-Rochester Conference Series on Public Policy'' no 39 1993 [http://www.stanford.edu/~johntayl/Papers/Discretion.PDF John Taylor] </ref><ref>[http://www.stanford.edu/~johntayl/PolRulLink.htm Stanford University Monetary Policy Rule Homepage]</ref><ref>[http://mpra.ub.uni-muenchen.de/18309/1/MPRA_paper_18309.pdf Antonio Forte ''The European Central Bank, the Federal Reserve and the Bank of England: is the Taylor Rule an useful benchmark for the last decade?'', Munich Personal RePEc Archive, November 2009]</ref>. | ||
==References== | |||
{{reflist}} | {{reflist}} | ||
Revision as of 03:35, 30 August 2010
The Jackson Hole consensus
(Summarised from a speech by Charles Bean at the 2010 Jackson Hole Conference[1])
- Discretionary fiscal policy is rejected as an instrument of demand management.
- The principal economic policy instrument is to be monetary policy, operated by the management of short-term interest rates.
- The monetary transmission mechanism operates mainly through longer-term interest rates, asset prices and expectations of future inflation.
- The conduct of monetary policy is best delegated to an independent central bank.
- The link between intermediate monetary targets and policy objectives is too unstable for their policy use.
- Monetary action should instead be targetted directly on inflation, but with some "constrained discretion" towards the pursuit of output stability
- Asset markets provide an efficient means of risk distribution and are not normally amenable to monetary policy action
- Financial markets are generally well developed and well regulated, and systematic crises are therefore unlikely.
The Taylor rule
The rule states that the real short-term interest rate (that is, the interest rate adjusted for inflation) should be determined according to three factors:
- where actual inflation is relative to the targeted level that the Fed wishes to achieve;
- how far economic activity is above or below its "full employment" level; and,
- what the level of the short-term interest rate is that would be consistent with full employment.
The rule recommends a relatively high interest rate (that is, a "tight" monetary policy) when inflation is above its target or when the economy is above its full employment level, and a relatively low interest rate ("easy" monetary policy) in the opposite situations. [2][3][4].
References
- ↑ Charles Bean, Matthias Paustian, Adrian Penalver and Tim Taylor: Monetary Policy after the Fall, Federal Reserve Bank of Kansas City Annual Conference Jackson Hole, Wyoming, 28 August 2010[1]
- ↑ John B Taylor "Discretion versus Policy Rules in Practice", in Carnegie-Rochester Conference Series on Public Policy no 39 1993 John Taylor
- ↑ Stanford University Monetary Policy Rule Homepage
- ↑ Antonio Forte The European Central Bank, the Federal Reserve and the Bank of England: is the Taylor Rule an useful benchmark for the last decade?, Munich Personal RePEc Archive, November 2009