Brief Outline of Topics Covered in Lecture 11
Chapter 20 Money Demand [cont.]
The government budget constraint and inflation
Chapter 21 Output, Inflation, and Monetary Policy
The AE curve (also called the IS curve)
- Investment, consumption and the interest rate
- Net exports and the interest rate
- Shifts in the IS curve
- Slope of IS curve
The Monetary Policy Reaction Curve
- The Fed's reaction to inflation and output
- Shifts in the MP curve
- Slope of MP curve
Video:
Additional Reading:
- Monitoring and enforcement - Environmental Economics
- The impact of disaster expectations on asset prices - Vox EU
- Is QE working? Evidence from the UK - Vox EU
- Swiss Magic and Central Bank Price-Targeting - The Street Light
- Fed policymakers mull how to share goals - Washington Post
- Prolegomenon to Any Useful Discussion of Modern Finance - Brad DeLong
- Should we believe the German labour-market miracle? - Vox EU
Application:
This is the Press Release from Wednesday's FOMC meeting:
Press Release, Release Date: November 2, 2011, For immediate release: Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.