presentasi moneter

1. EKONOMI MONETER II
MONETARY POLICY:
GOALS AND TARGETS

2. Reference
• Frederick S Miskin, Ekonomi Uang,
Perbankan, Pasar Keuangan, Chapter 18
2

3. 3
Goals Of Monetary Polıcy
• Understanding the conduct of monetary
policy is important, because it not only
affects the money supply and interest
rates but also has major influence on the
level of economic activity.
• Central Banks uses its monetary policy
tools to change the money supply and
interest rates and, ultimately to achieve its
goal of economic performance

4. 4
Goals Of Monetary Policy
• Central Banks focus on six basic goals
– High employment
– Economic growth
– Price Stability
– Interest rate stability
– Stability of financial markets
– Stability of foreign exchange markets

5. 5
Goals Of Monetary Polıcy
• High Employment (Low rate of unemployment)
High unempoyment causes much human misery
(financial distress, loss of self respect) and loss of output
(the economy has idle workers and resources) and when
u is high, the economy has not only idle workers but also
idle resources, resulting in a lower GDP.
• Economic Growth
Policy makers also seek steady economic growth, to
increase in the economy’s output of goods and services.
İt is also closely related to the high employment goal

6. 6
Goals Of Monetary Policy
• Price Stability
Inflation erodes the value of money as a medium of
exchage and a unit of account. Inflation also makes
prices less usefull as signals for resource alloctaion.
There are large social and economic cost of inflation by
creating uncertainty in the economy.
• Interest Rate Stability
Fluctuations in interest rates can also create uncertainty
in the economy and affects decisions for savers and
investors.

7. 7
Goals Of Monetary Polıcy
• Stability of Financial Markets
When financial markets and institutions are not efficient
in matching savers and borrowers, resources are lost.
Financial market stability makes possible efficient
matching by channeling funds from savers to borrowers
• Foreign Market Stability
In the global economy, FX market stability or limited
fluctuatios in the foreign exchange value of domestic
currency is an important monetary policy goal.

8. 8
Problems in Achieving Monetary
Policy Goals
• Many of the goals mentioned are consistent with each
other as, for example,
• high employment with economic growth, and
• i stability with financial market stability.
• However, P stability is in conflict with i stability and low u
in the short run (but probably not in the long run). For
example, when the economy is expanding and u  both
 and i may start to . If the Bank tries to prevent an  in
i, this may cause the economy to overheat and stimulate
. But if the Bank  i to prevent , in the short run u may
.
• The conflict among goals may thus present central
banks with some hard choices!

9. Should Price Stability Be the Primary Goal of
Monetary Policy?
• Hierarchical Versus Dual Mandates:
– hierarchical mandates put the goal of price stability first, and then
say that as long as it is achieved other goals can be pursued
– dual mandates are aimed to achieve two coequal objectives: price
stability and maximum employment (output stability)
• Price Stability as the Primary, Long-Run Goal
of Monetary Policy
- Either type of mandate is acceptable as long as it
operates to make price stability the primary goal in the long run, but
not the short run

10. 10
CENTRAL BANK STRATEGY:
USE OF TARGETS
• Central Banks;
– wish to achieve a certain goal,
– but can not directly influence goals and
influence the goals with a lag
– also have set of tools (OMOs, discount rate,
to set reserve requirment ratio) to employ that
can affect the goals indirectly after a period of
time.
– thus, central banks attempt to solve these
problems by using targets to meet its goals.

11. 11
CENTRAL BANK STRATEGY: USE
OF TARGETS
• Targets
– partially solve the central banks’ inability to
control directly the variables that determine
economic performance
– reduce the timing lags in observing and
reacting to economic fluctuations.
• Targets are variables that the central banks can
influence directly and that help achieve
monetary policy goals

12. 12
CENTRAL BANK STRATEGY: USE
OF TARGETS
• Central banks relies on two types of targets;
– Intermediate targets
are financial variables such as monetary aggregates
or interest rates that have a direct effect on goals.
– Operating targets
are monetary variables such as reserve aggregates
and short run interest rates that have direct effect on
financial variables and central bank can directly
control by using policy tools.

13. 13
CENTRAL BANK STRATEGY: USE
OF TARGETS
• All central banks
– pursue a strategy for conducting monetary policy
– by aiming at variables that lie between its tools and
the achievment of its goals
• The strategy is as follows;
– To decide on its goals such as economic growth or
price stability
– to choose a set of variables to aim for, intermediate
targets (M1,M2,M3 or short/long term interest rates)
– to choose another set of variable to aim for, operating
targets (monetary base, non monetary base , short
term interest rates) which are more responsive to the
tools.

14. 14
CENTRAL BANK STRATEGY: USE
OF TARGETS
Tools
↓
Operating targets
↓
Intermediate tagets
↓
Goals

15. 15
CENTRAL BANK STRATEGY: USE
OF TARGETS

16. 16
Use of (Operating and
Intermediate) Targets
• Suppose that the Bank wants to achieve a 5% rate of
growth for nominal GDP and is targeting an aggregate
(say M1+). If the Bank feels that the 5% nominal GDP
growth rate will be achieved by a 4% growth rate for M1+
(its intermediate target), which will in turn be achieved by
a 3% MB growth rate (its operating target), it will use its
tools to achieve the 3% MB growth rate.
• After implementing this policy, if the Bank finds that MB
is growing too slowly, it can use open market purchases
to increase it. Somewhat later the Bank will begin to see
how its policy affects the growth rate of M1+. If M1+ is
growing too fast (say at 7%), the Bank will reduce its
open market purchases or make open market sales to
reduce the M1+ growth rate.

17. 17
CENTRAL BANK STRATEGY: USE
OF TARGETS
• Why Central Banks pursue a such
strategy?
– it is easier to hit the goal by aiming at targets
than aiming at the goals directly.
– it can be more quickly judge whether its
policies are on the right track than wait and
see

18. 18
CENTRAL BANK STRATEGY: USE
OF TARGETS
• Choosing the targets
Types of target variables :
1. Aggregates
2. Interest rates
• Central banks can not choose to pursue both of
these target variables together
• Central Bank either choose interest rate or
aggregates at one time as target variable since
can not control both variable at the same time

19. 19
Why Central Banks can not choose both
variable at the same time? (Monetary
aggregate)
1. M d fluctuates
between M d' and
M d''
2. With M-target at
M*, i fluctuates
between i' and i''

20. 20
Why Central Banks can not choose both
variable at the same time? (Interest Rate
Target)
1. M d fluctuates
between M d' and
M d''
2. To set i-target at
i* Ms fluctuates
between M' and
M''

21. 21
Criteria for choosing targets
• It is needed to examine what criteria should be
used to decide on target variables since a
choice has to be done.
• Criteria for choosing targets
Targets must be
- Measurable: Quick and accurate measurment of an
target is necessary, because target will be useful if it
signals rapidly
- Controlable: Central Bank must have effective control
over variables
- Predictable effect on goals: it must have a predictable
impact on a goal

22. 22
Criteria for choosing targets
• Interest rates aren’t clearly better than M
s
on criteria of
measurability and controllability because hard to
measure and control real interest rates
• Reserve aggregates and interest rates about equal on
criteria of measurability and controllability . For criteria of
predictability, if intermediate target is M
s
, then reserve
aggregate is better
• If the relationship between consumer and business
spending and investment decisions and the interest rate
is stable, interest rate targets offer a more predictable
way to stabilize economic fluctuations
• If the realtionship between the demand for money and
other assets and the interest rate is stable, targeting
monetary aggregates offers a more predictable
connection with its goals