Effectiveness of monetary policy

Economists have debated the effectiveness of monetary policy--the actions taken by central banks to stem inflation and foster sustainable levels of employment and production--since the time of the Great Depression in the 1930s. A dominant perspective once held that monetary policy was ineffective, but later schools of thought saw monetary policy's importance as equal to that of fiscal policy. Economists debate the relevant measures of money supply. "Narrow" money supply or M1 is currency in circulation and the currency in easily accessed chequing and savings accounts. "Broader" money supply measures such as M2 and M3 include term deposits and even money market mutual funds. Economists debate the finer points of the implementation and effectiveness of monetary policy but one thing is obvious. At the extremes, monetary policy is a potent force. In countries such as the Russian Republic, Poland or Brazil where the printing presses run full tilt to pay for government operations, money supply is expanding rapidly and the currency becomes rapidly worthless compared to goods and services it can buy. Very high levels of inflation or "hyperinflation" is the result. With 30-40% monthly inflation rates, citizens buy hard goods as soon as they receive payment in the currency and those on fixed income have their investments rendered worthless.

At the other extreme, restrictive monetary policy has shown its effectiveness with considerable force. Germany, which experienced hyperinflation during the Weimar Republic and never forgot, has maintained a very stable monetary regime and resulting low levels of inflation. When Chairman Paul Volcker of the U.S. Federal Reserve applied the monetary brakes during the high inflation 1980s, the result was an economic downturn and a large drop in inflation. The Bank of Canada, headed by John Crow, targeted 0-3% inflation in the early 1990s and curtailed economic activity to such an extent that Canada actually experienced negative inflation rates in several months for the first time since the 1930s.

Without much debate, the effectiveness of monetary policy, its timing and its eventual impacts on the economy are not obvious. That central banks attempt influence the economy through monetary is a given. In any event, insights into monetary policy are very important to the investor. The availability of money and credit are key considerations in the pricing of an investment.

43. “IS –LM” model: equilibrium.

The IS-LM-model

_ The IS curve represents the condition that the goods market is in equilibrium.

_ The LM curve represents the condition that the _nancial market is in equilibrium.

_ As we have drawn both lines in the (Y; i)-space we can draw them in one diagram.

Equilibrium in goods and _nancial markets simultaneously

University of VProperties:

_ As IS is downward and LM is upward sloping the equilibrium exists and is unique.

_ In IS-LM equilibrium both markets (goods, _nancial) are in equilibrium.

R ienna Chapter 4: IS-LM Model: Equilibriu

IS-LM-model

_ Кривая, представляет условие, что рынок товаров находится в равновесии.

_ Кривая LM представляет условие, что _nancial рынок находится в равновесии.

_ Поскольку мы потянули обе линии в (Y; i) - делают интервалы, мы можем привлечь их в одной диаграмме.

Равновесие в товарах и _nancial рынках одновременно

Университет VProperties:

_ Как, является нисходящим, и LM вверх клонится, равновесие существует и уникально.

_ В - LM равновесие, оба рынка (товары, _nancial) находятся в равновесии.