EPP Readings – Monetary Policy

  • The Reserve Bank has written a neat seven-page summary of how its open market operations work.
  • For an example of the factors the Reserve Bank takes into account in making its decisions, see its most recent March statement.
  • Some have advocated a return to the gold standard, a policy opposed by most economists and central banks. The debate is well covered by Wikipedia.
  • In Australia, Nicholas Gruen has suggested that we might also use fiscal policy to smooth the cycle. ACOSS held a conference on this some years ago. In the proceedings, Nicholas’s proposal is at page 18, and several critics have their say.
  • Paul Krugman’s baby-sitting co-op article is a beautiful lead-in to understanding monetary policy.
  • This paper from the US Congressional Budget Office discusses the tricky issue of measuring "potential output".
  • Last night, I glossed over some of the details of reserve ratios in Australia. Since 1999, reserve ratios have been replaced by the rule that banks must pay a levy to the Australian Prudential Regulation Authority. By contrast, US banks are still subject to a 10% required reserve ratio.

Quiz 6 (and answers) are now up on the course website.

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4 Responses to EPP Readings – Monetary Policy

  1. It is interesting that central bankers now seem to believe that more — and faster release of — information about their interest-rate decisions and decision-making processes makes for greater stability in investment markets. Is there any empirical evidence to support this view?

  2. Andrew Leigh says:

    Peter, I don’t know of any such evidence, though on its face it sounds plausible. I had merely assumed that such actions boosted the status of the central banker, and that this was good for stability.

  3. Thanks, Andrew. The Bank of England’s Monetary Policy Committee (which decides the Bank’s base interest rates) now releases the minutes of its meetings. I have heard of financial institutions who have developed sophisticated models of the individual members of the MPC, aiming better predict the MPC’s decisions. The models use autonomous intelligent software agents with representation of each individual’s Beliefs, Desires and Intentions (BDI) (the next revolution in computer science) to represent individual MPC members. Some large hedge funds have apparently been using similar BDI models for representation of individual traders on commodity exchanges in recent years.

  4. Andrew Leigh says:

    Peter, that’s fascinating — though I can’t help wondering whether allowing each member to follow their own Taylor rule is merely creating a whole bunch of variables we know nothing about.

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