Case For Monetary Policy Research Articles

Keep your friends close and your enemies closer – the case of monetary policy and financial imbalances

Abstract The global financial crisis (GFC) has shown that monetary policy focused on a stable price level may negatively affect the stability of the financial system. Therefore, achieving price and financial stability using interest rates as the main tool is difficult. In this paper, we analyse how often monetary policy strengthened imbalances in the financial system in 20 countries from 1999Q1 to 2020Q2. To this end, we compare monetary policy stance with a novel financial imbalance index (FII). We find that monetary policy is material in aggravating financial imbalances mostly in Eurozone countries. We attribute this finding to the ECB’s “too loose, too long” monetary policy and to difficulties with applying single monetary policies in countries with different economic conditions and in different phases of credit and financial cycles. Our results point to a need for a proactive macroprudential policy in the environment of low interest rates.

Taking a leap towards a real world macroeconomics teaching

Despite the centrality of finance in the workings of the modern capitalist economy, macroeconomics is still taught with no serious consideration of monetary and financial dynamics. This has become even more puzzling in the light of the recent financial crisis. Our paper discusses a more pluralistic framework for teaching basic macroeconomics, inclusive of some of the most important ideas of Keynes on interest and money. The incorporation of Keynesian economics not only allows students to broaden their thinking in considering alternative answers to given questions; it also reshapes the questions themselves. In doing so, it changes the framework within which students come to think of policy. Focusing on the case of monetary policy, we point out the commonality between the mainstream teaching paradigm and the actual mindset that influences policy making. Furthermore, we discuss the ways in which the scope and aims of monetary policy are altered under a Keynesian/Minskyan framework.

Exchange Rate Policy and Disinflation: The Spanish Experience in the ERM

The World EconomyVolume 20, Issue 2 p. 221-238 Exchange Rate Policy and Disinflation: The Spanish Experience in the ERM Philippe Bacchetta, Philippe Bacchetta Studienzentrum Gerzensee, Switzerland, Institut d'Análisi Econòmica (CSIC), Barcelona and CEPR, LondonSearch for more papers by this author Philippe Bacchetta, Philippe Bacchetta Studienzentrum Gerzensee, Switzerland, Institut d'Análisi Econòmica (CSIC), Barcelona and CEPR, LondonSearch for more papers by this author First published: 17 December 2002 https://doi.org/10.1111/1467-9701.00067Citations: 2AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume20, Issue2March 1997Pages 221-238 RelatedInformation

Monetary Policy Versus Wage Adjustment as a Response to Demand Shocks

One of the central questions in macroeconomic theory is whether aggregate demand shocks are best dealt with by government intervention or by price flexibility. If prices clear the market instantaneously there will be no unemployment problem, while, as shown by Fischer (I977) and Phelps and Taylor (I977), monetary policy can help alleviate unemployment if it is faster to respond to shocks than prices. The case for monetary policy does not, however, rely on it being fast to react relative to prices. As shown by Marini (i986), rational expectations imply that anticipated Government policy can help clear current markets. While rationality of expectations strengthens the case for monetary policy it may weaken the argument for increased price flexibility as a method of dealing with shocks. De Long and Summers (1 986) show that increased price flexibility can lead to an increase in the variance of output in an economy facing demand shocks; the expectation of quick price adjustment exacerbates short-run disequilibrium. This paper examines the effectiveness of price flexibility and monetary policy in a simple model where neither price makers nor the monetary authorities can react instantaneously to shocks. The model is one of overlapping generations, with a single shock. The advantage of such a simple framework is that it clarifies the forces at work and allows direct welfare comparisons between adjustment rules. The first result is that greater price flexibility may decrease welfare, particularly if the effect of expected inflation on demand is non-linear. Slow price adjustment spreads the adjustment cost over many periods, and if demand is concave in expected inflation the aggregate volume of unemployment may be smaller if prices are reduced to their equilibrium level in stages rather than in one jump. Quick monetary policy aimed at full employment is shown to Pareto dominate a slow response. Both give full employment but a slow response requires the imposition of a higher inflation tax. While quick monetary policy is better than a slow response there is a case against instantaneous response to shocks. If full employment is guaranteed costlessly by government the wage and price level become indeterminate. Guaranteeing full employment by means of an inflation tax gives an incentive for wage and price setters to minimise the need for government intervention.

THE MONETARY AND CREDIT SYSTEM: THE CASE FOR MONETARY POLICY

Bulletin of the Oxford University Institute of Economics & StatisticsVolume 19, Issue 4 p. 323-326 THE MONETARY AND CREDIT SYSTEM: THE CASE FOR MONETARY POLICY T. WILSON, T. WILSON University College, Oxford.Search for more papers by this author T. WILSON, T. WILSON University College, Oxford.Search for more papers by this author First published: November 1957 https://doi.org/10.1111/j.1468-0084.1957.mp19004005.xAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Volume19, Issue4November 1957Pages 323-326 RelatedInformation