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Chapter 17: Q. 3 (page 468)
Why would it be problematic for a central bank to have a primary goal of maximizing economic growth?
Indeed, because this might bring about underlying changes in the economy that could prompt an expansion in inflation.
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Why might macroprudential regulation be more effective in managing asset-price bubbles than monetary policy ?
The Fed鈥檚 maximum employment mandate is generally interpreted as an attempt to achieve an unemployment rate that is as close as possible to the natural rate and inflation that is close to its goal for personal consumption expenditure price inflation. Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and a measure of the natural rate of unemployment (NROU). For the price index, adjust the units setting to 鈥淧ercent Change From Year Ago鈥� to convert the data to the inflation rate; for the unemployment rate, change the frequency setting to 鈥淨uarterly.鈥� Download the data into a spreadsheet. Calculate the unemployment gap and inflation gap for each quarter. Then, using the inflation gap, create an average inflation gap measure by taking the average of the current inflation gap and the gaps for the previous three quarters. Now apply the following (admittedly arbitrary and ad hoc) test to the data from :Q1 through the most recent data available: If the unemployment gap is larger than for two or more consecutive quarters, and/ or the average inflation gap is larger in absolute value than for two or more consecutive quarters, consider the mandate 鈥渧iolated.鈥�
a. Based on this ad hoc test, in which quarters has the Fed 鈥渧iolated鈥� the price stability portion of its mandate? In which quarters has the Fed 鈥渧iolated鈥� the maximum employment mandate?
b. Is the Fed currently 鈥渋n violation鈥� of its mandate?
c. Interpret your results. What does your response to part (a) and the data imply about the challenge that monetary policymakers face in achieving the Fed鈥檚 mandate perfectly at all times?
Why might it be better to lean against credit-driven bubbles rather than just clean up after asset bubbles burst?
鈥淪ince financial crises can impart severe damage to the economy, a central bank鈥檚 primary goal should be to ensure stability in financial markets.鈥� Is this statement true, false, or uncertain? Explain.
Classify each of the following as either a policy instrument or an intermediary target. Explain your answer.
a. Long-term interest rates
b. Central bank interest rates
c. M2
d. Reserve requirements
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