Monetary Policy Goals, Institutions, Strategies, and Instruments

by Bofinger, Peter

• ISBN13: 9780199248568
• ISBN10: 0199248567
• Format: Paperback
• Copyright: 2001-12-13
• Publisher: Oxford University Press

Summary

This book provides an in-depth description and analysis of monetary policyin Europe and the United States. Unusually for a volume in the field, it focuseson actual monetary policy---targets, institutions, strategies, andinstruments---but traditional and contemporary theoretical approaches tomonetary policy form the basis for each chapter. Concentrating specifically onthe European Central Bank, Monetary Policy offers one of the first comprehensiveguides to understanding the targets, strategy, and instruments of the ECB.In the past, many books have presented mere descriptions of the institutionalframework without providing a theoretical framework, while others have dealtmainly with theoretical aspects, thus neglecting the policy implications oftheir analysis. By combining a theoretical with a policy-oriented approach,Peter Bofinger succeeds in closing this gap in the monetary policy literature.As a result, his book will appeal to a broad readership, including investmentbankers and other professional investors, central bankers, and scholars workingin the field.

Table of Contents

List of figures	xi
List of tables	xiii
List of boxes	xv
List of abbreviations	xvi
Introduction	xviii
Part I. Theoretical Fundaments of Monetary Policy
What is money?	3	(17)
Introduction	3	(1)
A microeconomic approach to the definition of money	4	(7)
Defining money by its functions	11	(3)
Defining money by its statistical properties	14	(1)
The importance of a `correct' definition of money	15	(5)
Appendix 1.1. Definitions of money in the euro area, the United States, Japan, and the UK	15	(2)
Appendix 1.2. The concept of (net) financial assets (flow of funds analysis)	17	(3)
The demand for money	20	(20)
Introduction	20	(1)
The quantity theory of money and the Cambridge approach	21	(2)
The interest rate as a determinant of the money demand	23	(9)
The money demand function of Cagan	32	(1)
Wealth as a determinant of the demand for money	32	(2)
Empirical demand functions for money	34	(6)
Appendix 2.1. Cointegration	38	(2)
The money supply process: starting point of the transmission process	40	(31)
Introduction	40	(1)
Creation and control of the monetary base by the central bank	41	(5)
Consolidated balance sheet of the banking system and the supply of the money stock	46	(2)
The mechanistic multiplier process	48	(5)
A price-theoretic model of the money supply	53	(18)
Appendix 3.1. A `Poole analysis' for shocks	65	(6)
Monetary policy transmission	71	(56)
Introduction	71	(2)
Limited knowledge about the transmission process	73	(1)
The quantity theory channel	74	(6)
Interest rate channels	80	(15)
Expectations channels (the `Phillips curve')	95	(20)
Summary	115	(12)
Appendix 4.1. The original Poole model	116	(5)
Appendix 4.2. The concept of the `price gap'	121	(6)
Part II. Domestic Aspects of Monetary Policy
The ultimate goal and the final targets of monetary policy	127	(37)
Introduction	127	(4)
The long-term view: only price stability matters	131	(17)
Inflation and output growth in the short run	148	(5)
Operational issues of a `stability-oriented monetary policy'	153	(7)
Summary	160	(4)
Appendix 5.1. Different variants of the nominal GDP targeting	161	(1)
Appendix 5.2. Calculating the welfare losses of sub-optimal money holdings	162	(2)
The institutional framework for monetary policy I: `rules versus discretion'	164	(41)
Overview	164	(1)
Rules versus discretion in monetary policy	165	(1)
The main arguments for limiting the discretion of central bankers	165	(4)
Rules that are imposed on central banks from outside	169	(5)
Summary of the traditional debate	174	(1)
`Time inconsistency': a new argument in support of rules?	174	(31)
Appendix 6.1. The debate between the Banking School and the Currency School	202	(3)
The institutional framework of monetary policy II: the design of the central bank legislation	205	(35)
Overview	205	(2)
Independence of monetary policy	207	(13)
Accountability of central banks	220	(8)
Liability of incompetent central bankers	228	(12)
Appendix 7.1. The functions of central banks and the technology of the payments systems	234	(6)
Strategies (`simple rules') for a stability-oriented monetary policy	240	(53)
The function of simple rules	240	(5)
`Simple rules', intermediate targets, and indicators of monetary policy	245	(3)
Monetary targeting	248	(9)
Inflation targeting	257	(11)
The Taylor rule: a rule for an operating target	268	(6)
A nominal GDP rule	274	(19)
Appendix 8.1. The yield structure as an indicator of the stance of monetary policy	282	(11)
The conduct of monetary policy by the world's major central banks	293	(28)
A comparison of the performance of central banks	293	(2)
The monetary policy framework of the Deutsche Bundesbank	295	(5)
The monetary policy framework of the European Central Bank	300	(7)
The monetary policy framework of the Federal Reserve System	307	(4)
The monetary policy framework of the Bank of Japan	311	(6)
The monetary policy framework of the Bank of England	317	(4)
The Instruments of monetary policy	321	(48)
Basic requirements	321	(2)
Monetary base targeting v. interest rate targeting	323	(13)
Significance of individual monetary policy instruments	336	(12)
Money market management by the European Central Bank	348	(10)
Money market management by the Federal Reserve System	358	(3)
Money market management by the Bank of England	361	(3)
Money market management by the Bank of Japan	364	(1)
The New Political Economy and monetary policy instruments	365	(4)
Seigniorage and inflation tax	369	(18)
Introduction	369	(1)
Monetary seigniorage and fiscal seigniorage	370	(2)
Macroeconomic stability and seigniorage financing	372	(10)
Optimal seigniorage	382	(5)
Part III. Monetary Policy in an Open Economy
Important building blocks of open-economy macroeconomics	387	(23)
Introduction	387	(1)
The exchange rate as an operating target of monetary policy	388	(3)
The exchange rate as an intermediate target of monetary policy	391	(12)
The control of the price level in an open economy	403	(7)
Monetary policy strategies in an open economy	410	(19)
Introduction	410	(1)
Large-currency areas	411	(1)
Small open economies with targeted exchange rates	412	(17)
References	429	(18)
Index of names	447	(3)
Index of subjects	450