Monetary Policy

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					                                                                                                                    Interest rates
                                                                                                                    Price stability
                                                                                                            Demand management
                                                                                                                    Money supply
                                                                                                               Monetary stimulus
                                                                                                              Monetary tightening
                                                                                                                                      Key Terms
                                                                                                            Inflation expectations
                                                                                                     Price of borrowed money
                                                                                                                    Exchange rate
                                                                                                                         Time lag                                                       Monthly rate decisions
                                                                                                               Aggregate demand                                                         Quarterly Inflation Report
                                                                                                                       Output gap                                                       Transparency of meetings
                                                                                                                                                               Monetary Policy
                                                                                                                                                                                        Desire to be pro-active when setting interest rates
                                                                                                                                                               Committee
                                  CPI of 2% (1% band allowed)                                                                                                                           Preference for small changes in rates
                   RPI inflation much higher than CPI measure
                    A relaxation of the inflation target would      Inflation Target      Price stability                                                                                           Euro Zone Monetary Policy      Different inflation target
                    give the BoE more scope to change
                    interest rates                                                                                         Objectives                                                                                              No published minutes
                                                                                                                                                                                                                                   Fewer changes in rates
                                                                           Sustained economic growth
                                            Monitor the output gap
                                                                                                                                                                                                                     MPC sets the base rate of interest
                                          Desire to avoid excess AD       Keeping AD in line with LRAS
                                                                                                                                                                                                                     Lenders set their rates around this base rate
                                     Smoothing the economic cycle
                                                                                                                                                                           Operation of Monetary Policy              Daily intervention in money markets
                                                                                                                                                                                                                     Lender of last resort function to the banks
                                                                                                                                                                                                                     e.g. in 2008 during the credit crunch
                              Only one above target (Apr 2007)                                                                                                                                                       No supply-side credit controls
                                                                      Inflation usually within target
                                                                                                                                                                                                                     Operating mainly on demand for money
                                        No recession since 1992       Continued growth of real GDP
                                                                   Credible monetary policy regime                                                                                                                                                                    expectations for economy
                                                                                                                                                                                                                                             Consumer confidence
                                                                          Low inflation expectations                                                                                                                                                                  expectations for own finances
                                    Helps stimulate investment        Lower long term interest rates                                                                                                                                                                             savings ratio
                                                                                                                                                                                                                                             Incentives to save and borrow
                                                                                                                         The Monetary Policy                                                                                                                                     demand for credit
                                    Has helped keep inflation
                                    down in the UK                   Favourable low global inflation                     Committee Record                                                          How Monetary Policy                                                  equity withdrawal
                                                                                                                                                                                                                                             Housing market effects
                                                                                                                                                                                                   Works: The Transmission                                              affordability of a mortgage
                                   Bursting of dot.com bubble                                                                                Monetary Policy                                       Mechanism
                                                                    Responded well to some shocks                                                                                                                                                                                interest rate differentials
                               Shock of sharp rise in oil prices
                                                                                                                                                                                                                                             Changes in the exchange rate        hot money can cause change in
                                 Interest rates too low from                                                                                                                                                                                                                     the exchange rate
                                 2002 onwards?
                                                                   May have misread housing boom                                                                                                                                                                                     business confidence
                        Slow reaction to the sub-prime crisis?                                                                                                                                                                               Planned business capital spending
                                                                                                                                                                                                                                                                                     interest rates help to control inflation
                                Working alongside fiscal policy       Contributed to macro stability
                                                                                                                                                                                                                                             Changes in stocks / short-term output       expectations of demand


                                                      Time lags (12-24 months for full effects)
                                                                                                                                                                                                                 Floating exchange rate for the
                                                      Interest elasticity of demand may be low                                                                                                                   UK post 1992
                                                  regional asymmetries                                                                                                           The Exchange Rate               No official market intervention
                                                                             Policy asymmetries                    Limitations of
                                different interest elasticity of demand                                            monetary policy                                                                               Importance of trade flows
                               monetary policy may become                                                                                                                                                        Importance of capital flows
                               ineffective E.g. during a credit
                               crunch
                                                                     Risk of liquidity trap effect                                                                                           UK
                                Keynes called this "pushing on
                                a piece of string"                                                                                                             Recent monetary policy        USA
                                                                                                                                                               news articles                 Europe
                                                                                                                                                                                             Japan
                                                                                                                                                                                             Other countries
                                                                                                                                                                                             Blog articles on monetary policy




Monetary Policy.mmap - 21/03/2008 -