Challenges for Monetary Policy in the Evolving Financial Environment

MullinsJr, David W.

doi:10.1007/978-1-349-25382-1_5

Cited by 6 publications

(6 citation statements)

References 19 publications

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“…Even in the 1960s, Friedman did not consider it expedient to specify an objective in terms of in¯ation, as in¯ation reacts to the variation in the quantity of 1 The elements of continuity that link monetarism to the new classical economics are highlighted in Lucas's (1996) Nobel Lecture. For a description of the recent developments in monetary theory see, for example, Snowdon et al (1994), Pierce (1995), Goodhart (1995), Meltzer (1997), Taylor (1997), Padoa Schioppa (1997), Laidler (1995) and Mullins (1997). 2 See Goodhart (1989Goodhart ( , 1995, Wood (1995), Taylor (1997), Padoa Schioppa (1997), Mullins (1997), B. Friedman (1997.…”

Section: Introductionmentioning

confidence: 99%

“…For a description of the recent developments in monetary theory see, for example, Snowdon et al (1994), Pierce (1995), Goodhart (1995), Meltzer (1997), Taylor (1997), Padoa Schioppa (1997), Laidler (1995) and Mullins (1997). 2 See Goodhart (1989Goodhart ( , 1995, Wood (1995), Taylor (1997), Padoa Schioppa (1997), Mullins (1997), B. Friedman (1997. 3 For an analysis of the strategy of`in¯ation targeting' see Bernanke and Mishkin (1997), Mishkin and Posen (1997).…”

Section: Introductionmentioning

confidence: 99%

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Is Kaldor's Theory of Money Supply Endogeneity Still Relevant?

Bertocco

2001

Metroeconomica

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Contemporary monetary theory is characterized by the predominance of the monetarist thesis. Paradoxically, the widespread acceptance of the monetarists' conclusions has coincided with the disappearance of the stable relation between money stock and nominal income from the 1980s onwards. These results did not call the monetarist theory into question, but instead stimulated the elaboration of various proposals for the modi®cation of the monetary authorities' operative schemes. Each of these proposals gives rise to some perplexity. These anomalies provide the justi®cation for this paper, which sets out to analyse the characteristics of the money supply endogeneity theory, a theoretical approach initiated in the 1970s thanks to Kaldor's seminal contribution, with the objective of demonstrating the inconsistencies in the monetarists' conclusions. It is intended to show that the debate on the endogeneity theory developed by the postKeynesians has overlooked an essential aspect of Kaldor's theory, the examination of which permits: (a) the elaboration of an important criticism of monetarism; and (b) the development of a theory of credit and of ®nancial intermediaries that highlights elements of Keynes's theory that have been neglected by the traditional interpretation.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Is Kaldor's Theory of Money Supply Endogeneity Still Relevant?

Bertocco

2001

Metroeconomica

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“…53 Different views on the October 1987 consequences of portfolio insurance based on dynamic trading of stocks are advanced in Hull (1997) and Mullins (1997). The latter also provides a general review of the empirical literature exploring effects of derivatives on asset markets.…”

Section: Using Options To Alter Market Expectationsmentioning

confidence: 99%

Monetary Policy When the Nominal Short-Term Interest Rate is Zero

Clouse¹,

Henderson²,

Orphanides³

et al. 2003

Topics in Macroeconomics

136

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In an environment of low inflation, the Federal Reserve faces the risk that real interest rates could remain elevated and that it was not providing enough monetary stimulus even though it had pushed the short-term nominal interest rate to its lower bound of zero. Assuming the nominal Treasury-bill rate had been lowered to zero, this paper considers whether further open market purchases of Treasury bills could spur aggregate demand through increases in the monetary base that may stimulate aggregate demand by increasing liquidity for financial intermediaries and households; by affecting expectations of the future paths of short-term interest rates, inflation, and asset prices; or by stimulating bank lending through the credit channel.This paper also examines the alternative policy tools that are available to the Federal Reserve in theory, and notes the practical limitations imposed by the Federal Reserve Act. The tools the Federal Reserve has at its disposal include open market purchases of Treasury bonds and private-sector credit instruments (at least those that may be purchased by the Federal Reserve); unsterilized and sterilized intervention in foreign exchange; lending through the discount window; and, in some circumstances, may include the use of options.

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“…To the extent that relative supplies of assets are also a determinant of asset prices, the cash payout of policy options that are unsuccessful in reducing bond rates may have a positive influence 24 Different views on the October 1987 consequences of portfolio insurance based on dynamic trading of stocks are advanced in Hull (1997) and Mullins (1997). The latter also provides a general review of empirical literature on the effects of derivatives on asset markets.…”

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confidence: 99%

Short Rate Expectations, Term Premiums, and Central Bank Use of Derivatives to Reduce Policy Uncertainty

Tinsley

1999

SSRN Journal

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Abstract:The term structure of interest rates is the primary transmission channel of monetary policy. Under the expectations hypothesis, anticipated settings of the short-term interest rate controlled by the central bank are the main determinants of nominal bond rates. Historical experience suggests that bond rates may remain relatively high even if the short-term interest rate is reduced to zero, in part due to term premiums reflecting uncertainty about future policy. Term spreads due to policy uncertainty may be reduced by central bank trading desk options that provide insurance against future deviations from an announced interest rate policy. The term structure of interest rates is the primary transmission channel of monetary policy. Under the assumption that policy actions are summarized by movements in the one-period short rate, policy transmissions to the real economy are influenced more by market perceptions of monetary policy than by the current actions of the central bank trading desk in the spot market for the short rate.The main subject of this paper is the role of market perceptions of policy when expectations of long-term inflation are low and, consequently, the average level of nominal interest rates is significantly lower than the level of postwar rates. In critical episodes, such as a persistent recession where the short rate may be driven near zero, historical experience suggests long-term bond rates may remain well above zero. This paper indicates derivative securities issued by the trading desk may tighten connections between policy intentions for the short rate and current long-term interest rates. Discussion is directed principally at policy options to influence nominal yields on Treasury securities.Market perceptions embedded in long-term bond rates include both averages of expected future short-term rates and uncertainty about future policy responses, which is priced in the term premium components of bond rates. Market short rate forecasts and variances are based on conjectured or average-history descriptions of future policy. In the case of the latter, estimated policy response functions help agents to quantify representative policy responses to current and future events.Data-based characterizations of policy range from reduced-form time series models of the short rate to structural feedback rules, such as the calibrated example of Taylor (1993), where future short rate responses are conditioned on forecast indicators of the economy such as inflation and output deviations from trend. Because policymakers are subject to the same difficulties in forecasting future states of the economy as are private sector agents, it is usually unrealistic for policymakers to make unconditional forecasts of their future actions.However, in times of unusual economic stress, policymakers may wish to consider policy use of more explicit contingent contracts in order to transmit unambiguous signals to markets regarding the direction and volatility of the policy-controlled short rate over a near-term horizon of...

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Challenges for Monetary Policy in the Evolving Financial Environment

Cited by 6 publications

References 19 publications

Is Kaldor's Theory of Money Supply Endogeneity Still Relevant?

Is Kaldor's Theory of Money Supply Endogeneity Still Relevant?

Monetary Policy When the Nominal Short-Term Interest Rate is Zero

Short Rate Expectations, Term Premiums, and Central Bank Use of Derivatives to Reduce Policy Uncertainty

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