Posts Tagged interest rates
Uncertainty and monetary policy rules in the United States
“Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape” (Greenspan 2003).
Uncertainty is a central issue in monetary policy, as the quote from Alan Greenspan above illustrates. Empirical models, however, rarely take account of this, effectively assuming that policymakers ignore uncertainty. The evident focus of policymakers on uncertainty suggests that this assumption is invalid and therefore that empirical models of monetary policy must account for uncertainty. This article considers the effects of uncertainty about the true state of the economy on monetary policy, estimating a monetary policy rule that allows for this.
Our empirical model combines elements of Svensson’s (1997) model of inflation forecast targeting with models drawn from the theoretical literature on optimal monetary policy when there is uncertainty about the true state of the economy, most prominently Svensson and Woodford (2003, 2004) and Swanson (2004). In existing models of monetary policy under certainty, monetary policy affects inflation and the output gap directly, so it is optimal for policymakers to use these variables in forming monetary policy. This is the basis for the Taylor rule (Taylor 1993) model of monetary policy and its subsequent refinements (e.g., Woodford 2003).
Tags: economy, Import, inflation, interest rate, interest rates, models, monetary, monetary policy, optimal monetary policy, taylor rule, woodfordRelated posts
Bond Fundamentals – Monetary Policy and Fiscal Policy
It’s the Federal Reserve Bank that influences the money supply. Three tools are used to implement monetary policy:
- Open Market Operations
- Discount Rates
- Reserve Requirements
Since open market operations is the tool used most, we will cover it. Here’s how it works: When the economy is growing too fast and the Fed is worried about the inflation rate, it will sell government securities from its portfolio to the open market. This decreases bank reserves, which means the money supply decreases. When there are less bank and businesses have to pay the bank more in order to borrow. This discourages consumers and businesses from borrowing. Less borrowing means less spending, which slows the economy and eventually can reduce price pressures.
Tags: bond fund, borrow money, Business, economic, economy, Employment, fiscal, fiscal policy, government, Home Loan, Home Loans, Import, inflation, inflation rate, interest rate, interest rates, investment, Loans, market, monetary, monetary policy, money, money supplyRelated posts
