Summary Of Monetary Policy PDF

**1. Introduction** - This section introduces the concept of examining the connections between monetary policy, financial regulation, and business cycles. - It emphasizes that there is no single economic model that can explain all national and historical business cycles. - The impor...

**1. Introduction** - This section introduces the concept of examining the connections between monetary policy, financial regulation, and business cycles. - It emphasizes that there is no single economic model that can explain all national and historical business cycles. - The importance of considering macroeconomic views, history, politics, and empirical data is highlighted. 2. **2. The Basic Model** - This section introduces a basic macroeconomic model to analyse the relationship between monetary policy, financial regulation, and business cycles. - It covers the following aspects: - **Macroeconomic Framework:** An open economy model with perfect capital mobility and flexible exchange rates is used. - **Supply Side:** The supply side is built by considering the markets for goods and services (with mark-up pricing), labour markets (with wage bargaining), and the production function (Cobb-Douglas). - **Demand Side:** The aggregate demand is influenced by real factors, monetary factors, expectations, and financial accelerators. - **Role of Banking and Finance:** The model incorporates the role of banking and finance as sources of leverage and their impact on aggregate demand. - **Macroprudential Policy:** The central bank can use macroprudential policies to manage leverage and promote financial stability. - **Equilibrium and Policies:** The model determines the equilibrium values of output growth and inflation, and it allows for the analysis of various supply-side and demand-side policies. 3. **3. The Classic View** - This section explores the Classic View (CV) of macroeconomics, which emphasizes the role of efficient markets in determining the business cycle. - **Key Assumptions:** The CV assumes that production precedes trade, all markets are efficient (including labor markets), and uncertainty is irrelevant. - **Policy Implications:** The CV suggests a limited role for active macroeconomic policies, as markets are self-adjusting. 4. **4. The Traditional View** - This section discusses the Traditional View (TV), which acknowledges market imperfections but still emphasizes the self-adjusting nature of economies. - **Key Differences from CV:** The TV allows for short-term market imperfections and the potential need for policy intervention in the short run. - **Policy Implications:** The TV suggests a limited role for active policies in the long run, as markets eventually equilibrate. 5. **5. The Modern View** - This section examines the Modern View (MV), which incorporates the role of expectations and uncertainty in shaping macroeconomic outcomes. - **Key Features:** The MV includes the role of expectations in both aggregate supply and aggregate demand, as well as the impact of financial accelerators. - **Policy Implications:** The MV suggests a more active role for macroeconomic policies, including monetary policy and macroprudential regulation, to stabilize the economy. 6. **6. The Post-Modern Years** - This section discusses the challenges and policy responses in the aftermath of the 2007-2008 financial crisis and the COVID-19 pandemic. - **Key Events:** The section covers the Great Crisis, the Great Moderation, the Great Recession, and the Great Pandemic. - **Policy Implications:** The section highlights the need for unconventional monetary policies, macroprudential regulation, and fiscal interventions to address these challenges. 7. **7. Monetary Policy and Central Banking: Past, Present, and Future** - This section explores the evolution of monetary policy and central banking, including the role of central bank independence, monetary policy rules, and the redistributive effects of monetary policy. - **Key Topics:** The section covers the political economy of central banking, the role of expectations in monetary policy, the use of monetary policy rules (such as the Taylor Rule), and the distributional consequences of monetary policy decisions. **In short:** [1 institution] (CB), [2 macro policies] (monetary and financial), [3 tools] (econ, political eco, history) In short: - **AD is the total amount of goods and services** within an economy at a given overall price level. It represents the sum of spending by consumers, businesses, the government, and foreign entities on domestic goods and services. - Graphically -\> typically slopes downward. As the general price level rises, the quantity of goods and services demanded falls (due to factors like reduced purchasing power and increased interest rates) - AD = C + I + G +(X-M) , with C consumer spending, I business investment, G govt spending, X-M net export (exports minus imports) - **AS is the total quantity of goods and services** that producers in an economy are willing to **supply** at a given overall price level. It reflects the productive capacity of an economy. It will be a positive relationship between output growth (x axis) and inflation (y axis). - Graphically -\>Usually slopes upward. As the general price level rises, producers are willing to supply more goods and services (due to higher profit potential) - AS = f(L, K, T, N) , with L labour, K capital, T technology, N natural resources **Increase in AD**: can lead to higher output and inflation (rightward shift) **Decrease in AD**: can lead to lower output and deflation (leftward shift) **Increase in AS**: can lead to higher output and lower inflation (rightward shift) **Decrease in AS**: can lead to lower output and higher inflation (leftward shift) \-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-- AS depends on [markets of G&S], [labour market], [production of G&S] - **Pricing in markets for G&S** depends on costs (wages), firms\' market power (mark-up), and random shocks. Les prix sont déterminés (et donc l\'inflation augmente) en fonction des coûts (w), de la marge que les entreprises se font (mark-up, qui dépend de la compétition, plus µ décroît, plus il y a de compétition\*), et des potentiels chocs qui feront augmenter ou non les prix. \*rent factor is the ratio of the mark-up levels between two subsequent years - **Labour markets** is associated with the state of employment growth given the role of other structural factors. We assume nominal wage growth (market-clearing price) and employment growth are closely associated (as wages increases, employment increases). So, wage is determined by inflation expectations (ϖe), the rigidity factor (*b*)\*, and the employment rate (n). \* *b* is an index 0\