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1、Chapter 21Monetary Policy Strategy:The International Experience 2005 Pearson Education Canada Inc.Role of a Nominal AnchorTies Down ExpectationsHelps Avoid Time-Consistency Problem1.Arises from pursuit of short-term goals which lead to bad long-term outcomes2.Time-consistency resides more in politic
2、al process3.Nominal anchor limits political pressure for time-consistency2 2005 Pearson Education Canada Inc.Exchange-Rate TargetingAdvantages1.Fixes for internationally traded goods2.Anchors expectations3.Automatic rule,avoids time-consistency4.Easy to understand:“sound currency”as rallying cry5.He
3、lps economic integration6.Successful in reducing France,UK,Mexico3 2005 Pearson Education Canada Inc.Exchange-Rate TargetingDisadvantages1.Loss of independent monetary policyProblems after German reunification:UK,French monetary policy too tight2.Open to speculative attacksEurope,Sept.1992;Mexico:19
4、94;Asia:19973.Successful speculative attack disastrous for emerging market countries because it leads to financial crisis4.Weakened accountability:lose exchange-rate signal4 2005 Pearson Education Canada Inc.Currency Boards vs.DollarizationCurrency Boards1.Domestic currency exchanged at fixed rate f
5、or foreign currency automatically2.Fixed exchange rate with very strong commitment mechanism and no discretion3.Usual disadvantages of fixed exchange rate4.Still subject to speculative attack5.Lose ability to have lender of last resortDollarization1.Even stronger commitment mechanism2.No possibility
6、 of speculative attack3.Usual disadvantages of fixed exchange rtae4.Lose seignorage 2005 Pearson Education Canada Inc.5Summary:Advantages and Disadvantages of Different Monetary Policy Strategies6 2005 Pearson Education Canada Inc.Summary:Advantages and Disadvantages of Different Monetary Policy Str
7、ategies7 2005 Pearson Education Canada Inc.Monetary TargetingCanada1.Targets M1 till 1982,then abandons it2.1988:declining targets,M2 as guideUnited Kingdom1.Targets M3 and later M02.Problems of M as monetary indicatorJapan1.Forecasts M2+CDs2.Innovation and deregulation makes less useful as monetary
8、 indicator3.High money growth 1987-1989:“bubble economy,”then tight money policyGermany and Switzerland1.Not monetarist rigid rule2.Targets using M0 and M3:changes over time3.Allows growth outside target for 2-3 years,but then reverses overshoots4.Key elements:flexibility,transparency,and accountabi
9、lity 2005 Pearson Education Canada Inc.8Monetary TargetingAdvantages1.Able to cope with domestic considerations2.Signals are immediate3.Immediate accountability of central bankDisadvantages1.Big if:all advantages require reliable relationship between goal and targeted aggregate2.In many countries,we
10、ak relationship between goal and M-aggregatePoor communications device and accountability9 2005 Pearson Education Canada Inc.Inflation TargetingFive Elements1.Public announcement of medium-term-target2.Institutional commitment to price stability3.Information inclusive strategy4.Increased transparenc
11、y through public communication5.Increased accountability10 2005 Pearson Education Canada Inc.Inflation Targeting in New Zealand,Canada,and the UK 2005 Pearson Education Canada Inc.11Inflation TargetingAdvantages1.Allows focus on domestic considerations2.Not dependent on reliable relationship between
12、 M-aggregate and inflation3.Readily understood by public4.Reduce political pressures for time-consistent policy5.Focus on transparency and communication6.Increased accountability of central bank7.Performance good:and e ,and stays low in business cycle upturn12 2005 Pearson Education Canada Inc.Infla
13、tion TargetingDisadvantages1.Delayed signalling2.Too much rigidity3.Potential for increased output fluctuations4.Low economic growthNominal GDP Targeting1.Close to inflation targeting with concern about output fluctuations2.Problem of announcing specific target for real GDP growth3.Harder for public
14、 to understand13 2005 Pearson Education Canada Inc.Monetary Policy with an Implicit Nominal AnchorForward-Looking and Preemptive to Deal With Long LagsAdvantages1.Focus on domestic considerations2.Has worked very well in the U.S.3.If It Aint Broke Why Fix It?Disadvantages1.Lack of transparency and accountability2.Dependence on personalities3.Inconsistent with democratic principles14 2005 Pearson Education Canada Inc.