Podcast
Questions and Answers
What does the IS-Curve represent in the IS-PC-MR model?
What does the IS-Curve represent in the IS-PC-MR model?
Which statement is true regarding the effects of monetary policy in the long-run?
Which statement is true regarding the effects of monetary policy in the long-run?
What kind of expectations does the Phillips Curve take into account?
What kind of expectations does the Phillips Curve take into account?
What is the role of the central bank according to the consensus on monetary policy?
What is the role of the central bank according to the consensus on monetary policy?
Signup and view all the answers
Which of the following influences does the IS-PC-MR model predominantly reflect?
Which of the following influences does the IS-PC-MR model predominantly reflect?
Signup and view all the answers
What does the Phillips Curve primarily illustrate?
What does the Phillips Curve primarily illustrate?
Signup and view all the answers
What is the meaning of the term 𝛼 in the Phillips Curve equation?
What is the meaning of the term 𝛼 in the Phillips Curve equation?
Signup and view all the answers
What does the equation $y_1 = A - ar_0$ represent in the context of the IS-Curve?
What does the equation $y_1 = A - ar_0$ represent in the context of the IS-Curve?
Signup and view all the answers
In the IS-PC-MR model, what can cause crowding-out effects on fiscal policy?
In the IS-PC-MR model, what can cause crowding-out effects on fiscal policy?
Signup and view all the answers
Why are inflation expectations set as equal to previous period's inflation in the inertial Phillips Curve?
Why are inflation expectations set as equal to previous period's inflation in the inertial Phillips Curve?
Signup and view all the answers
What is indicated by a positive output gap (𝑦1 > 𝑦𝑒) in the context of the Phillips Curve?
What is indicated by a positive output gap (𝑦1 > 𝑦𝑒) in the context of the Phillips Curve?
Signup and view all the answers
What type of rigidities do monetary policy interventions mainly rely on?
What type of rigidities do monetary policy interventions mainly rely on?
Signup and view all the answers
What does the nominal interest rate set by the central bank influence in the short run?
What does the nominal interest rate set by the central bank influence in the short run?
Signup and view all the answers
What assumption underpins the idea that inflation in period t=0 is predetermined?
What assumption underpins the idea that inflation in period t=0 is predetermined?
Signup and view all the answers
According to the assumptions of the Phillips Curve, what contributes to the stickiness in prices and wages?
According to the assumptions of the Phillips Curve, what contributes to the stickiness in prices and wages?
Signup and view all the answers
What happens to inflation when the output gap is negative (𝑦1 < 𝑦𝑒)?
What happens to inflation when the output gap is negative (𝑦1 < 𝑦𝑒)?
Signup and view all the answers
What does the term $y_e$ represent in the model?
What does the term $y_e$ represent in the model?
Signup and view all the answers
How does the interest rate $r_0$ relate to the stabilizing interest rate $r_s$ according to equation (3)?
How does the interest rate $r_0$ relate to the stabilizing interest rate $r_s$ according to equation (3)?
Signup and view all the answers
What occurs if interest rates differ from the stabilizing rate $r_s$?
What occurs if interest rates differ from the stabilizing rate $r_s$?
Signup and view all the answers
What is the role of the Central Bank (CB) in relation to the output gap?
What is the role of the Central Bank (CB) in relation to the output gap?
Signup and view all the answers
What factors influence inflation at time t=0 (𝜋0)?
What factors influence inflation at time t=0 (𝜋0)?
Signup and view all the answers
What does the equation $y_1 - y_e = -a(r_0 - r_s)$ represent?
What does the equation $y_1 - y_e = -a(r_0 - r_s)$ represent?
Signup and view all the answers
What is the main concern of the central bank in its monetary policy rule?
What is the main concern of the central bank in its monetary policy rule?
Signup and view all the answers
Why is fiscal policy (FP) not accounted for in the model?
Why is fiscal policy (FP) not accounted for in the model?
Signup and view all the answers
In the loss function (L) of the central bank, what does the parameter 𝛽 indicate?
In the loss function (L) of the central bank, what does the parameter 𝛽 indicate?
Signup and view all the answers
What is indicated by the expression $y_1 - y_e$?
What is indicated by the expression $y_1 - y_e$?
Signup and view all the answers
How does the value of 𝛽 affect the central bank's response to inflation and output?
How does the value of 𝛽 affect the central bank's response to inflation and output?
Signup and view all the answers
What does a positive output gap ($y_1 > y_e$) suggest about the current interest rate ($r_0$)?
What does a positive output gap ($y_1 > y_e$) suggest about the current interest rate ($r_0$)?
Signup and view all the answers
In the IS-PC-MR model, what does the IS curve represent?
In the IS-PC-MR model, what does the IS curve represent?
Signup and view all the answers
What is the purpose of the inertial Phillips Curve (PC) in this model?
What is the purpose of the inertial Phillips Curve (PC) in this model?
Signup and view all the answers
What does the central bank consider when setting its current policy (𝑟0)?
What does the central bank consider when setting its current policy (𝑟0)?
Signup and view all the answers
Which statement accurately describes the impact of 𝜷 on the monetary policy rule (MR)?
Which statement accurately describes the impact of 𝜷 on the monetary policy rule (MR)?
Signup and view all the answers
What does the Taylor Rule primarily indicate about interest rates and inflation?
What does the Taylor Rule primarily indicate about interest rates and inflation?
Signup and view all the answers
Which condition triggers Central Bank intervention according to the given content?
Which condition triggers Central Bank intervention according to the given content?
Signup and view all the answers
How does an increase in the inflation aversion parameter ($eta$) affect the Central Bank's interest rate decisions?
How does an increase in the inflation aversion parameter ($eta$) affect the Central Bank's interest rate decisions?
Signup and view all the answers
What happens when the Phillips curve is steeper, indicated by an increase in $oldsymbol{eta}$?
What happens when the Phillips curve is steeper, indicated by an increase in $oldsymbol{eta}$?
Signup and view all the answers
According to the Taylor Rule, what relationship does Eq.(7) illustrate?
According to the Taylor Rule, what relationship does Eq.(7) illustrate?
Signup and view all the answers
What is a key characteristic of the New Consensus in Macroeconomics (NCM)?
What is a key characteristic of the New Consensus in Macroeconomics (NCM)?
Signup and view all the answers
What did Bernanke (2015) find regarding the actions of the US Fed from 1995 to 2015?
What did Bernanke (2015) find regarding the actions of the US Fed from 1995 to 2015?
Signup and view all the answers
In the context of the content, what does a flatter IS-curve imply about the Central Bank's interest rate adjustments?
In the context of the content, what does a flatter IS-curve imply about the Central Bank's interest rate adjustments?
Signup and view all the answers
What does the long-run neutrality of money imply?
What does the long-run neutrality of money imply?
Signup and view all the answers
What is represented by NAIRU in macroeconomic theory?
What is represented by NAIRU in macroeconomic theory?
Signup and view all the answers
What does the IS-PC-MR model emphasize in terms of economic policy?
What does the IS-PC-MR model emphasize in terms of economic policy?
Signup and view all the answers
What does the optimal problem of the Central Bank focus on?
What does the optimal problem of the Central Bank focus on?
Signup and view all the answers
According to the Taylor Rule, what does the adjustment of the interest rate depend on?
According to the Taylor Rule, what does the adjustment of the interest rate depend on?
Signup and view all the answers
What role does fiscal policy play according to the content provided?
What role does fiscal policy play according to the content provided?
Signup and view all the answers
How is the output gap represented in the IS equation?
How is the output gap represented in the IS equation?
Signup and view all the answers
What does the PC equation illustrate in the context of inflation?
What does the PC equation illustrate in the context of inflation?
Signup and view all the answers
Study Notes
Advanced Macroeconomics - Lecture 8: Monetary Policy I
- Monetary Policy Consensus: Business cycles are demand-driven, but demand effects are limited to the short-run. Monetary policy (MP) impacts short-run output due to nominal and/or real rigidities. Short-run effects are not seen in the long-run.
- Long-Run Monetary Neutrality: In the long run, MP doesn't affect output but does affect inflation. Supply-side equilibrium (like NAIRU) is independent of monetary policy.
- Phillips Curve and Expectations: The Phillips curve must account for expectations (forward or backward looking).
- Rational Expectations: Central banks (CB) set interest rates to control inflation. CBs must account for a lag in policy implementation.
- Fiscal Policy Considerations: Fiscal policy can be subject to crowding-out effects and can interfere with CB aims.
- Predominant Theoretical Approach: The model presented is primarily New Keynesian, though influenced by Monetarist and New Classical economics.
Building Blocks of the IS-PC-MR Model
-
IS-Curve: A negative relationship between real output (y) and real interest rates (r) exists, although with a time lag. Output depends on real interest rates in the previous period. Fiscal policy also impacts output.
-
Stabilizing Interest Rate: There's a target interest rate (rs) to stabilize the economy in period T+1. The difference between the current and target rate will affect output.
-
Fiscal Policy: Fiscal policy has no impact within this economic model due to the assumed crowding-out problem.
-
Potential Output/NAIRU: The model deals with the level of output where there is no pressure on wages or prices. This is similar to a long-run concept/full-employment output or NAIRU, depending on how the market functions.
-
Phillips Curve (PC): A contemporaneous positive relationship between output and inflation (including inflation expectations). Inflation in the next period depends on current output gap and past expected inflation.
-
Inflation Expectations: Inflation expectations are equal to inflation in the previous period, indicating inertia.
-
Graphical PC Properties: The slope represents the sensitivity of inflation changes to output fluctuations, and shifts occur as the past inflation rate influences the present.
-
Monetary Policy Rule (MR): A policy lag exists. The central bank aims to minimize deviations from a target inflation rate and potential output through a loss function. The Taylor Rule is one form of monetary policy rule, which is a reaction function of the CB.
-
Policy Lag: Actions taken at time t do not have an immediate impact. There's a delay in the effect of the measures in period t on the next period's (i.e., t+1) output and inflation.
-
CB Target: The Central Bank sets nominal interest rates to affect real interest rates, but inflation expectations are a key factor in the process
Full IS-PC-MR Model
- CB Targeting: The central bank targets inflation and potential output using interest rate changes.
- Policy Lag: CB considerations involve anticipating how policy will influence inflation and output in the future.
Interest Rate Rule (Taylor Rule)
- Optimal Interest Rate Adjustment: The rule describes how the CB should change real interest rates based on the difference between actual and target inflation. This adjustment depends on the values of variables like β, a, and a. Different values imply different responses to inflation and output gaps.
- Inflation Aversion vs. Output Gap Concern: The model shows that the Taylor Rule is dependent on the central bank's response to inflation vs concerns on unemployment. A higher sensitivity to inflation than unemployment causes interest rates to be adjusted more significantly.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This quiz covers the key concepts in Lecture 8 of Advanced Macroeconomics, focusing on monetary policy's impact on business cycles and inflation. It delves into the principles of long-run monetary neutrality, the Phillips curve, and the role of central banks in setting interest rates. Explore how different economic theories interact and influence fiscal policy outcomes.
