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The Conduct of
Monetary Policy:
Strategy and
Tactics
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(1)
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dual mandates are aimed to achieve two coequal objectives: price stability and
maximum employment (output stability)
Recall interest rates will be high if prices are high and the Fed wants to avoid this
Ex: US Federal Reserve Bank
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Inflation Targeting
Since price stability should be the primary long run
goal, central banks often use a practice known as
inflation targeting
Literally targeting and maintaining a set level of inflation
Remember some inflation is good (will happen naturally as
an economy grows), however too much is problematic
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Canada (1991)
Inflation decreased since then, some costs in term of
unemployment
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Disadvantages
Delayed signaling (effects of policies on inflation
may have lags)
Too much rigidity
Potential for increased output fluctuations
Low economic growth during disinflation
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Figure 1
Inflation Rates
and Inflation
Targets for New
Zealand,
Canada, and the
United Kingdom,
19802011
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Disadvantages
Lack of accountability (Fed is not transparent in its
intentions for future inflation, keeps business uncertain)
Inconsistent with democratic principles
If Fed is subject to political pressures (ex: presidential appointments)
they could follow political agendas
Fed is largely considered independent however
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