Low inflation Interest rate stability Stability in financial market (stock, bond, money market) Stability in exchange rate (at the level consistent with a country economic strategy)
Yanuar Dananjaya, Bsc., MM
Goal of Monetary Policy
High employment
Conduct of Monetary Policy
Measurement: # of job seeker / # of workforce
Mainly determined by supply and demand of workforce Will not reach zero Frictional unemployment employee change job, recent graduate. Shows dynamic economy Structural unemployment mismatch between job requirement and skill. Cannot be remedied by monetary policy Aim to natural rate of unemployment unemployment only due to frictional and structural. Australia in 2010/11
Yanuar Dananjaya, Bsc., MM
Goal of Monetary Policy (cont)
High Economic Growth
Conduct of Monetary Policy
Related to high employment
Appropriate inflation level Not too low, not too high Ideal 2-3% Deflation is very dangerous, can lead to economic stagnation Japan. Once happen, very difficult to remedy due to liquidity trap.
Yanuar Dananjaya, Bsc., MM
Goal of Monetary Policy (cont)
Conduct of Monetary Policy
Interest rate stability
Avoid uncertainty in the market credit rate, bond coupon, Required Rate of Return, etc Enhance central bank credibility easier to set interest rate Stability of Financial market Stability of banking system Stability of stock market Stability of bond market Stability of money market
Conflict between goal Increase rate to lower inflation means lowering economic growth and increasing unemployment Lagged effect of monetary policy: Recognition lag Implementation lag Impact lag Must be able to predict future economic condition Must avoid overshoot the target
Yanuar Dananjaya, Bsc., MM
Problems with monetary policy (cont)
Conduct of Monetary Policy
Lowering credibility if too much adjustment of interest
rate or any other central bank policy Credit crunch CB lowering interest rate but because economic condition is very bad, banks will not give credit Liquidity trap CB lowering interest rate, but because economic condition is very bad, companies will not take credit. CB lowering until zero, but still companies will not take credit. Japan 90s and 2000s, US 2008 now
Yanuar Dananjaya, Bsc., MM
Strategies of monetary policy
Conduct of Monetary Policy
Inflation targeting focus on optimal inflation rate,
expect economic growth rate to follow Nominal income target focus on achieving a targeted economic growth. Usually set 3-5%, depends on history and various factors. Inflation will not go up too much because people realize once the growth target achieved, rate will go up.