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Chapter 17: Q.14 (page 468)

Why might macroprudential regulation be more effective in managing asset-price bubbles than monetary policy ?

Short Answer

Expert verified

Macroprudential regulation incorporates a policy to impact just the thing that is happening in credit showcases and is along these lines the right device for getting control over credit-driven asset-price bubbles.

Step by step solution

01

Concept Introduction

Regardless of whether an asset price bubble is going on, as asset prices increment and lift the viewpoint for financial movement and expansion, the money-related policy ought to respond by moving to a more prohibitive position. After an air pocket explodes and the standpoint for financial action degenerates, the policy ought to turn out to be more useful.

02

Explanation

As a complement to macroprudential tools, macroprudential regulation should be concerned with providing the stability of the financial system as a whole and the relief of risks to the real economy.

Macroprudential regulation directs to decisions that make the motivator framework for individual firms sound and reliable, so externalities - impacts of one's choices on others - are incorporated.

03

Step 3; Final Answer

Macroprudential regulation incorporates a policy to impact just the thing is happening in credit advertises and is consequently the right apparatus for getting control over credit-driven asset-price bubbles

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Most popular questions from this chapter

. The Federal Open Market Committee (FOMC) meets about every six weeks to assess the state of the economy and to decide what actions the central bank should take. The minutes of this meeting are released three weeks after the meeting; however, a brief press release is made available immediately after the meeting. Find the schedule of minutes and press releases under the 鈥淢eeting calendars and information鈥� tab at http://www.federalreserve.gov/fomc/.

a. When was the last scheduled meeting of the FOMC? When is the next meeting?

b. Review the press release from the last meeting. What did the committee decide to do about short-term interest rates?

c. Review the most recently published meeting minutes. What areas of the economy seemed to be of most concern to the committee members?

鈥淭he zero lower bound on short-term interest rates is not a problem, since the central bank can just use quantitative easing to lower intermediate and longer-term interest rates instead.鈥� Is this statement true, false, or uncertain? Explain.

How does inflation targeting help reduce the time inconsistency problem of discretionary policy.

. Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), real GDP (GDPC1), an estimate of potential GDP (GDPPOT), and the federal funds rate (DFF). 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 federal funds rate, change the frequency setting to 鈥淨uarterly.鈥� Download the data into a spreadsheet. Assuming the inflation target is 2% and the equilibrium real fed funds rate is 2%, calculate the inflation gap and the output gap for each quarter, from 2000 until the most recent quarter of data available. Calculate the output gap as the percentage deviation of output from the potential level of output.

a. Use the output and inflation gaps to calculate, for each quarter, the fed funds rate predicted by the Taylor rule. Assume that the weights on inflation stabilization and output stabilization are both 陆 (see the formula in the chapter). Compare the current (quarterly average) federal funds rate to the federal funds rate prescribed by the Taylor rule. Does the Taylor rule accurately predict the current rate? Briefly comment.

b. Create a graph that compares the predicted Taylor rule values with the actual quarterly federal funds rate averages. How well, in general, does the Taylor rule prediction fit the average federal funds rate? Briefly explain.

c. Based on the results from the 2008鈥�2009 period, explain the limitations of the Taylor rule as a formal policy tool. How do these limitations help explain the use of nonconventional monetary policy during this period?

d. Suppose Congress changes the Fed鈥檚 mandate to a hierarchical one in which inflation stabilization takes priority over output stabilization. In this context, recalculate the predicted Taylor rule value for each quarter since 2000, assuming that the weight on inflation stabilization is 戮 and the weight on output stabilization is 录. Create a graph showing the Taylor rule prediction calculated in part (a), the prediction using the new 鈥渉ierarchical鈥� Taylor rule, and the fed funds rate. How, if at all, does changing the mandate change the predicted policy paths? How would the fed funds rate be affected by a hierarchical mandate? Briefly explain.

e. Assume again equal weights of 陆 on inflation and output stabilization, and suppose instead that beginning after the end of 2008, the equilibrium real fed funds rate declines by 0.05 each quarter (i.e. 2009:Q1 is 1.95, then 1.90, etc.), and once it reaches zero, it remains at zero thereafter. How does it affect the prescribed fed funds rate? Why might this be important for policymakers to take into consideration?

What are the key advantages and disadvantages of the monetary strategy used by the Federal Reserve under Alan Greenspan, in which the nominal anchor was implicit rather than explicit?
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