Monetary theory and monetary policy a central banker's view

Summary In this article attention is paid to monetary theory, the relationship between the instruments of monetary policy and other important macro-economic policy instruments, and finally to the real possibilities of pursuing an effective monetary policy. The conclusion from the theoretical analysis is that the total money supply must be considered one of the most important macro-economic policy instruments. An excessive supply of money will sooner or later lead to inflation, to the debasement of money. Therefore the volume of money should be controlled. The use and effectiveness of monetary policy should always be seen in the context of other policy instruments, especially fiscal policy and, under circumstances, wage- and price policy. The possibilities to pursue an effective monetary policy are not unlimited. The effectiveness of such a policy can,e.g., be hampered by external factors. It is vital for a central bank to have the widest possible range of instruments at its disposal.     

Optimal choice of monetary policy instruments when policymaking is costly

Poole's analysis of the optimal choice of monetary policy instruments assumes that stochastic disturbances are temporary, that a monetary authority determines instrument settings each period, and that policymaking is a costless activity. This paper considers an environment in which shocks are cumulative, the monetary authority precommits to instrument settings for an interval of its own choosing, and the authority incurs costs when it adjusts its instrument settings. The key result that arises in this framework is that costs of policymaking generally induce a monetary authority either to choose a socially suboptimal policy instrument or to adjust its policy instrument settings over time in a manner that appears to be inefficient.     

Postwar monetary policy

Summary Monetary policy has played an active role in Dutch postwar economic policy. Essentially, it has sought to contribute to balanced economic growth by controlling the money supplyM ₂ in relation to national income. Policy measures extend to all sources of money creation-viz. bank credit, public sector finance and the balance of payments - and are predominantly of the quantitative type. This is reflected, among other things, in medium-term targets for the structure and outcome of the balance of payments and the size and coverage of the public sector's borrowing requirement. Internationally, the Netherlands favour and participate in stable exchange rate systems. This has not led to serious conflicts with domestic monetary objectives until the seventies, when excessive easing of monetary conditions had to be accepted temporarily.     

Transparency in monetary policy

The paper examines different aspects of transparency. Transparency serves democratic accountability by promoting public control. Specifically, the degree of transparency conditions inflation expectations, hence the central bank's scope for stabilization. Recent studies have put doubt on the notion that complete transparency is socially desirable. Here it is pointed out that the conclusion critically depends on an asymmetric modelling of stochastic preferences. The paper also reviews the pros and cons of revealing individual voting. A conclusion is that secrecy is to be prefered in monetary unions in order to shield governors from pressure by home governments. Presidential Address presented at the Fifty-Third International Atlantic Economic Conference, March 13–17, 2002, Paris, France.     

Uncertainty and monetary policy

The experience of monetary policy making in an uncertain environmenthas encouraged increased attention to the concept of model uncertainty,that is, uncertainty as to which is the best model. A particulardifficulty has been the need to operationalise the concept inorder to yield definitive policy recommendations. If this typeof uncertainty is unquantifiable, then a policy rule determinedby a single model may not in fact be the best approach; pluralismof method and the exercise of judgement offer a potential solution.A rigorous foundation for such an approach is available in Keynes'sphilosophical analysis of decision making under uncertainty.It is concluded that more analytical attention needs to be devotedto agents’ own model uncertainty, and to judgement. Butultimately the scope for synthesis between the model uncertaintyand Keynes uncertainty approaches rests on whether or not thesubject matter is such that knowledge of it is best representedby one formal model.     

Domestication of monetary policy

The article touches upon the issue of the independence of monetary policy, the impossible trinity, and the exchange-rate policy. It has been shown that independent monetary policy is possible and estimates of the limits of its independency have been given.     

Making monetary policy: objectives and rules

What is it that monetary policy-makers do and how do they doit? The simple answer is that a central banker moves interestrates in order to maintain steady real growth and stable prices.In this essay, I examine the issues that arise in framing theproblem faced by monetary policy-makers. I begin with a discussionof how, over the past decade or so, central banks have beenmade more independent and more accountable. The result has beenthe virtual elimination of the inflation bias problem that iscaused by political interference in the monetary policy process,and better overall macroeconomic performance. The essay proceedswith an example of a formal version of the policy-makers' problem,describing their objectives and the information they need toformulate a policy rule. I conclude with a discussion of a simpleversus complex policy rules, the impact of uncertainty on policy-making,and how central bankers use formal modelling in making theirday-to-day decisions.     

Market discipline and monetary policy

The effects of forward looking expectations of future inflationon equilibrium inflation and interest rates are examined withinan imperfect information framework. Expectations of future inflationaffect equilibrium in a manner similar to an increase in thecentral bank's weight on future social welfare, making it morelikely an opportunistic central bank will actually deliver onits announced inflation targets, and output expansions can ariseeven if the central banker is revealed to be a low inflationtype. The model also illustrates the channels through whichinflation scares raise current real interest rates.     

Effectiveness of history-dependent monetary policy

In this paper, we evaluate the effectiveness of history-dependent monetary policy, focusing on the design of targeting regimes and simple policy rules. Our quantitative analysis is based on a small estimated forward-looking model of the Japanese economy with a hybrid Phillips curve. Our main findings are: (1) History-dependent targeting regimes, such as price level targeting and income growth targeting, outperform inflation targeting; (2) Committing to a simple history-dependent policy rule results in nearly the same social welfare as the optimal delegation of price level targeting and income growth targeting; (3) The central bank can achieve almost the same performance as the optimal commitment policy by adopting the first difference hybrid policy rule in which the change in interest rate responds to inflation, output gap, and real income growth rate. J. Japanese Int. Economies 18 (3) (2004) 330–361.     

Bank competition and monetary policy

There is an apparent theoretical discrepancy between the effects of monetary policy shocks on economies with differently competitive banking sectors. We employ cross-country data to investigate this hypothesis with two different approaches. First, using aggregate data we analyze the correlation between two indices: (i) a cumulative impulse response function providing an index of the effect of monetary policy shocks; and (ii) Panzar and Rosse's H-statistic as an index of the state of bank competition. Second, using disaggregated data we regress bank lending on the interaction of bank competition and monetary policy shocks. The first approach does not provide any evidence of a relationship between monetary policy shocks and bank competition. However, the second approach suggests that competition in the banking industry leads to smaller monetary policy effects on bank lending.     

A K-percent rule for monetary policy in West Germany

Zusammenfassung Eine Regel für ein konstantes Geldmengenwachstum in der Bundesrepublik Deutschland. - Die Geldpolitik in der Bundesrepublik Deutschland war in der Vergangenheit recht unstetig; sie hat konjunkturelle Schwankungen mitverursacht und au\erdem zu einem fortw?hrenden Anstieg des Preisniveaus beigetragen. Mit einem einfachen Modell wird untersucht, wie die wirtschaftliche Entwicklung verlaufen w?re, wenn sich die Deutsche Bundesbank seit {dy1974} an ihre Absicht gehalten h?tte, die Geldmenge entsprechend dem Wachstum des Produktionspotentials auszudehnen („potentialorientierte Geldpolitik”). Die Simulationen zeigen, da\ bei strikter Einhaltung einer „k-percent rule” - ?hnlich wie von Milton Friedman vorgeschlagen - die konjunkturellen Ausschl?ge der Inlandsausgaben geringer ausgefallen w?ren und das Preisniveau im Durchschnitt konstant geblieben w?re. Dieses Ergebnis widerspricht der weitverbreiteten These, da\ Geldmengenregeln nicht hilfreich seien.

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Resumen Una regla del k por cien para la política monetaria en Alemania Occidental. - La política monetaria en la República Federal de Alemania fué bastante inestable en el pasado. Ella contribuyó a la aparición de fluctuaciones coyunturales y además a un aumento del nivel de precios. Con un modelo simple se estudia cuál hubiera sido la trayectoria del desarrollo económico en caso de que el Banco Central Alemán hubiera continuado después de {dy1974} con su intención de expandir la cantidad de dinero de acuerdo al crecimiento potencial del producto (política orientada hacia el crecimiento potencial). Las simulaciones demuestran que en caso de respetar estrictamente una norma del k por cien - cómo ha sido propuesto por Milton Friedman - las fluctuaciones coyunturales del gasto interno hubieran resultado menores y el nivel de precios hubiera permanecido constante. Este resultado contradice la tésis comúnmente aceptada de que reglas para la oferta de dinero no tienen efecto alguno.

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Résumé Une k-pourcent règle pour une politique monétaire en Allemagne de l’Ouest. - La politique monétaire dans la RFA était assez instable dans le passé; elle a contribué aux fluctuations de la conjoncture et aussi à une montée continuelle du niveau de prix. L’auteur analyse à l’aide d’un modèle simple comment le développement économique s’aurait été passé si le Deutsche Bundesbank aurait suivi son intention depuis {dy1974} d’agrandir la masse monétaire en correspondance avec la croissance de la production potentielle (?politique monétaire orientée au potentiel?). Les simulations démontrent que sous la condition d’une stricte observation d’une ?règle k-pourcent? - comme proposée par Milton Friedman - les fluctuations conjoncturelles des dépenses locales auraient été plus petites et le niveau de prix en moyenne aurait resté constant. Ce résultat contredit la thèse très répandue que des règles de masse monétaire ne soient pas utiles.

     

分析中国货币政策的有效性

我国货币政策的最终目标是稳定币值,促进经济稳定增长。中央银行是通过货币政策工具控制和调节中介目标———货币供应量来实现这个最终目标的。本文通过探讨货币是中性还是非中性,货币供应量是内生还是外生,我国货币政策的传导机制是否畅通这三个问题,最终得出了我国货币政策