© the mcgraw-hill companies, inc., 2008 mcgraw-hill/irwin chapter 23 modern monetary policy and the...
TRANSCRIPT
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Chapter 23
Modern Monetary Policy and the Challenges
Facing Central Bankers
23-2
Modern Monetary Policy:The Big Questions
1. What are the various channels of monetary policy transmission?
2. What are the factors that make modern monetary policy so difficult?
23-3
Japan and the U.S.
What made the Japanese and U.S. experiences of the last 20 years so different?
23-4
Japan: Growth and Interest Rates
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U.S.: Growth and Interest Rates
23-6
Modern Monetary Policy:Roadmap
• Monetary Policy Transmission Mechanism
• Challenges Facing Modern Monetary Policymakers
23-7
The Monetary Policy Transmission Mechanism: Traditional Channels
Interest Rates and Exchange Rates
the traditional channels of monetary policy transmission aren’t very powerful
23-8
The Monetary Policy Transmission Mechanism: Credit Channels
Bank Lending and Balance Sheet Channels
• By altering the supply of funds to the banking system, policymakers can affect banks' ability and willingness to lend
• an open market purchase has a direct impact on the supply of loans, increasing their availability to those who depend on banks for financing
• as interest rates fall, the supply of loans increases
23-9
The Monetary Policy Transmission Mechanism: Asset Price Channels
Investment and Wealth
• a fall in the interest rate – pushes stock prices up – drives the mortgage rate down leading to higher demand for
residential housing, driving up the prices of existing homes
• Higher asset prices mean increased wealth and higher consumption
23-10
The Monetary Policy Transmission Mechanism
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• If neighborhoods with high crime rates have more police, does that mean police cause crime?
• Finding correlations is straightforward
• Establishing causal relationships is difficult
23-12
• Why did Japan’s economy fail to respond to interest rates near zero?
• One possibility is that the stock market collapse lowered borrower net worth
• In addition, with borrowers unable to repay, banks had virtually no capital and could not make additional loans.
23-13
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The Challenges Modern Monetary Policymakers Face: Estimating Potential
During the late 1990s, people failed to recognize potential output was growing more rapidly than it had earlier. As a result, forecasts of GDP were consistently too low.
23-15
• Computing real returns means subtracting inflation from nominal returns
• In order to evaluation nominal interest rates, wage increase and the like, you need to know the level of inflation
23-16
In the 1970s inflation rose in two big bursts
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One possible explanation is that Fed policymakers failed to realize that growth had slowed.
23-18
The Challenges Modern Monetary Policymakers Face: Deflation
Deflation & Zero Nominal Interest Rate Bound:
– Nominal interest rates can't fall below zero– This places a restriction on what monetary
policymakers can do – The most effective way to expand the monetary
base when the overnight interest rate has fallen to zero is to shift to targeting longer-term rates.
23-19
The Challenges Modern Monetary Policymakers Face: Booms and Busts
Booms & Busts in Equity & Property Prices
Bubbles that inflate and then burst are particularly damaging, because the wealth effects they create cause consumption to explode and then contract just as rapidly.
23-20
The Nasdaq Bubble
23-21
The Challenges Modern Monetary Policymakers Face
Evolving Financial Structure
changes in financial structure will change
the impact of monetary policy.
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Chapter 23
End of Chapter