Monetary policy as the stabilization activity 1
The dualism of monetary policy Monetary policy: policy of determining volume of money in the economy in order to keep inflation under control as well as to affect production and income. „The prime aim of NBP is the preservation of stable price level. It can also support government in its economic policy on condition that such support doesn’t restrain the prime goal”. NBP Act 2
Two objectives of monetary policy Stable prices / anti-inflation activity (ECB, NBP) Stable growth/ anti-cyclical activity (Fed) 3
Objectives of monetary policy in different economic doctrines Keynesism: economic growth and full employment within economic equilibrium Monetarism: price stability (leading to faster economic growth and more flat business cycle sinusoid in long-run) 4
Two objectives and three types of monetary policy SIT (strict inflation targeting): contractionary monetary policy resulting in price stability; growth stimulation is considered secondary goal FIT (flexible inflation targeting): compromising monetary policy that balances two objectives; growth stimulation is accompanied by less strict price control SOT (strict output-gap targeting): expansionary / easy monetary policy that assumes growth stimulation the prime objective 5
Expansionary monetary policy 6
Contractionary monetary policy 7
How does money market affect goods market? 8
The impact of interest rates on consumption (1) Decrease in interest rates positively affects the autonomous part of consumption: ◦ loans become cheaper, ◦ deposits become more attractive leading to higher inclination of households to convert savings into consumption. 9
The impact of interest rates on consumption (2)
The impact of interest rates on investment (1) Decrease in interest rates positively affects investment spending of firms: ◦ loans become cheaper, ◦ deposits become less attractive resulting in lower willingnes of firms to put their cash surpluses into the bank intead of investing them. 11
The impact of interest rates on investment (2)
Interest rates and aggregate demand: recap. 13
How does goods market affect money market? 14
Aggregate demand, income and interest rates (1) Growing AD leads to increases in GDP. Greater GDP turns into bigger demand for money. Greater demand for money leads to upward pressure on interest rates.
Aggregate demand, income and interest rates (2)
Crowding out effect 17
Monetary policy objectives vs. independence of central banks From the political point of view the key economic problem is unemployment (and recession / slower economic growth responsible for it). Therefore government can be interested in the usage of the monetary policy to deal with this problem. However, this may lead to lagged increase in the inflation rate. 18
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