Conducting Monetary Policy: General Readings
Much of the material covered in this Lesson is a review and minor extension
of that covered in earlier Lessons and the relevant readings will therefore
already have been assigned. The Taylor Rule is new here, however, and a
discussion of it can be found on pages 491 and 492 of the Third Edition of
N. Gregory Mankiw's intermediate text, Macroeconomics, under
the heading Case Study 18-3. Equivalent material will surely
be present in other editions of this text and should be easily found by
referring to the indexes. Another excellent reading in ending these Lessons
is Chapters 18 and 19 of the Sixth Edition of Paul R. Krugman and Mauice Obstfeld,
International Economics, Theory and Policy published by Addison
Wesley. These chapters are entitled The International Monetary System,
1870-1973 and Macroeconomic Policy and Coordination under Floating
Exchange Rates. The material in these two chapters outlines the history
of what has happened in the world economy from 1870 to 2002 and gives
interpretations of these facts. These interpretations are interesting because
some appear inconsistent with the analysis of our series of Lessons. In working
through this material you should puzzle over the following questions:
- Is the adoption of a current account target consistent with our analysis of
output market or flow equilibrium of an economy in the module entitled
The Balance of Payments and the Exchange Rate? In thinking about this,
distinguish carefully between short-run and long-run equilibrium. How is both
external and internal balance established in our analysis?
- In the analysis of the price-specie-flow mechanism, what is to prevent
holders of excess money balances from restoring portfolio equilibrium by purchasing
or selling assets abroad?
- In the section on "Rules of the Game", what are the conditions under which
central banks of countries losing gold can push up interest rates and attract
capital from abroad?
- How do expenditure changing and expenditure switching policies fit into our
analysis in the module, The Balance of Payments and the Exchange
Rate? How does monetary policy operate within this framework?
- Was the agreement of the United States to buy and sell gold at 35 dollars
per ounce under the Bretton Woods System a "safeguard against inflation"? How
could the United States devalue its currency under that system? How was that
accomplished under the Smithsonian Agreement?
- Did the collapse of the Bretton Woods system and introduction of flexible
exchange rates give countries monetary policy autonomy? Did it create symmetry
in the sense that the United States was no longer able to dominate in the setting
of world monetary policy?
- In thinking about the material in Chapter 19, continually distinguish between
the facts about what happened to exchange rates and the explanations of those facts.
What kind of evidence is presented to justify particular interpretations and
explanations? Pay particular attention to the reasons given for the appreciation
of the U.S. dollar in the first half of the 1980s as compared to the implications
of our OLS regression results concerning Japan's real exchange rate with respect
to the United States in the Topic entitled The Orderly Markets Approach.
Could the observed real exchange rate movements have resulted from tight monetary
policy in the United States?
Choose a Topic in the Lesson