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1、,Chapter 21,Monetary Policy Strategy:The International Experience,2005 Pearson Education Canada Inc.,2005 Pearson Education Canada Inc.,21-2,Role of a Nominal Anchor,Ties Down ExpectationsHelps Avoid Time-Consistency Problem1.Arises from pursuit of short-term goals which lead to bad long-term outcom
2、es2.Time-consistency resides more in political process3.Nominal anchor limits political pressure for time-consistency,2005 Pearson Education Canada Inc.,21-3,Exchange-Rate Targeting,Advantages1.Fixes for internationally traded goods2.Anchors expectations3.Automatic rule,avoids time-consistency4.Easy
3、 to understand:“sound currency”as rallying cry5.Helps economic integration6.Successful in reducing France,UK,Mexico,2005 Pearson Education Canada Inc.,21-4,Exchange-Rate Targeting,Disadvantages1.Loss of independent monetary policyProblems after German reunification:UK,French monetary policy too tigh
4、t2.Open to speculative attacksEurope,Sept.1992;Mexico:1994;Asia:19973.Successful speculative attack disastrous for emerging market countries because it leads to financial crisis4.Weakened accountability:lose exchange-rate signal,21-5,Currency Boards vs.Dollarization,Currency Boards1.Domestic currenc
5、y exchanged at fixed rate for 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 commitmen
6、t mechanism2.No possibility of speculative attack3.Usual disadvantages of fixed exchange rtae4.Lose seignorage,2005 Pearson Education Canada Inc.,2005 Pearson Education Canada Inc.,21-6,Summary:Advantages and Disadvantages of Different Monetary Policy Strategies,2005 Pearson Education Canada Inc.,21
7、-7,Summary:Advantages and Disadvantages of Different Monetary Policy Strategies,21-8,Monetary Targeting,Canada1.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
8、 deregulation makes less useful as monetary 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 eleme
9、nts:flexibility,transparency,and accountability,2005 Pearson Education Canada Inc.,2005 Pearson Education Canada Inc.,21-9,Monetary Targeting,Advantages1.Able to cope with domestic considerations2.Signals are immediate3.Immediate accountability of central bankDisadvantages1.Big if:all advantages req
10、uire reliable relationship between goal and targeted aggregate2.In many countries,weak relationship between goal and M-aggregatePoor communications device and accountability,2005 Pearson Education Canada Inc.,21-10,Inflation Targeting,Five Elements1.Public announcement of medium-term-target2.Institu
11、tional commitment to price stability3.Information inclusive strategy4.Increased transparency through public communication5.Increased accountability,21-11,Inflation Targeting in New Zealand,Canada,and the UK,2005 Pearson Education Canada Inc.,2005 Pearson Education Canada Inc.,21-12,Inflation Targeti
12、ng,Advantages1.Allows focus on domestic considerations2.Not dependent on reliable relationship between 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.Pe
13、rformance good:and e,and stays low in business cycle upturn,2005 Pearson Education Canada Inc.,21-13,Inflation Targeting,Disadvantages1.Delayed signalling2.Too much rigidity3.Potential for increased output fluctuations4.Low economic growthNominal GDP Targeting1.Close to inflation targeting with conc
14、ern about output fluctuations2.Problem of announcing specific target for real GDP growth3.Harder for public to understand,2005 Pearson Education Canada Inc.,21-14,Monetary Policy with an Implicit Nominal Anchor,Forward-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 principles,
