Book contents
- Frontmatter
- Contents
- List of charts, figures, and tables
- Preface
- List of symbols
- 1 The roles of money and monetary policy in the macroeconomy
- 2 A model of the macroeconomy
- 3 The new classical model: the case against stabilization policy
- 4 The institutionalist model: the case for stabilization policy
- 5 The demand for money
- 6 The supply of money
- 7 The monetary mechanism
- 8 U.S. monetary policy and the dilemma of stagflation
- 9 A model of an open economy
- 10 Managed exchange rates and monetary policy
- 11 Monetary policy in Canada and its macroeconomic consequences
- 12 Improving the monetary policy apparatus
- Index
7 - The monetary mechanism
Published online by Cambridge University Press: 26 October 2011
- Frontmatter
- Contents
- List of charts, figures, and tables
- Preface
- List of symbols
- 1 The roles of money and monetary policy in the macroeconomy
- 2 A model of the macroeconomy
- 3 The new classical model: the case against stabilization policy
- 4 The institutionalist model: the case for stabilization policy
- 5 The demand for money
- 6 The supply of money
- 7 The monetary mechanism
- 8 U.S. monetary policy and the dilemma of stagflation
- 9 A model of an open economy
- 10 Managed exchange rates and monetary policy
- 11 Monetary policy in Canada and its macroeconomic consequences
- 12 Improving the monetary policy apparatus
- Index
Summary
INTRODUCTION
From the previous chapters we have learned what monetary policy can and cannot do to stabilize income and employment. In this chapter we can start to look at how the monetary authorities should approach their task in the light of their limited capabilities. In other words, we are now more concerned with techniques than with ultimate goals. In this chapter, then, the emphasis is not on monetary policy but on the monetary mechanism while we look into the “control room” of the central bank. We know that the macroeconomy is subjected from time to time to random shocks from all directions, causing output, employment, inflation, and the interest rate to deviate from long-run equilibrium values. The aim of stabilization policy is to find a monetary mechanism that mitigates the effect of these shocks, especially on income and employment. This involves finding a policy instrument over which the monetary authority has complete control, which has a predictable effect on the important macroeconomic variables, and which creates countercyclical forces automatically. Therefore, there are three important features to look for in an optimal monetary mechanism: controllability, effectiveness, and automaticity. There is no sense in choosing a policy instrument that is only very imprecisely regulated by the central bank. An example would be the amount of currency held by the public, since the central bank cannot “force” individuals to hold a certain fraction of the total currency outstanding.
- Type
- Chapter
- Information
- Money in the Macroeconomy , pp. 185 - 209Publisher: Cambridge University PressPrint publication year: 1986