Tiểu luận môn đầu tư tài chính the monetary policy and

 Autonomous changesAutonomous tightening of monetary policy • Lower inflation they could increase by 1% point, and so raise the real interest rate at any given inflation rate.. Autonomo

T h e M o n e t a r y P o l i c y a n d

A g g r e g a t e D e m a n d C u r v e s

1.The Federal Reserve and Monetary Policy

2 The Monetary Policy Curve

3 Application

4 The Aggregate Demand Curve

5 Summary

analyze HOW MONETARY POLICY

AFFECTS AGGREGATE DEMAND ?

Start this chapter by explaining :

WHY MONETARY POLICYMAKERS SET INTEREST RATES TO

RISE WHEN INFLATION INCREASES ?

(AD)

Discuss short-run economic fluctuations

THE FEDERAL RESERVE

AND MONETARY

POLICY

PART 1

CENTRAL BANKS One of primary policy tool Short-term Interest Rate

FEDERAL RESERVE One of primary policy tool FEDERAL FUNDS RATE

FED controls Federal Funds Rate by varying the reserves, it

provides to the banking system

More Reserves

Banks have more money to lend to each

other

Excess liquidity Fed rate fall 

Less Reserves Banks have less to

lend

Shortage of liquidity Fed rate rise 

Fed rate is a nominal interest rate, but we learned in the previous chapter it is the real interest rate that affects net exports and business

spending, thereby determining the level of equilibrium output

How does the Federal Reserve’s control of the Fed rate enable it to control the real interest

monetary policy impacts the economy ?

(1)

r : real interest rate

i : nominal interest rate : expected inflation

(1)

Changes in nominal interest rates can change the real interest rate only if actual and expected inflation remain unchanged in the short run.

Fed lowers the Fed rate  real interest rates 

Fed raises the Fed rate  real interest rates 

THE MONETARY POLICY

CURVE

PART 2

The monetary policy (MP) curve indicates the relationship between

the real interest rate the central bank sets and the inflation rate.

: real interest rate

: autonomous component of the real interest rate

: responsiveness of the real interest rate to the inflation rate

Example : = 1.0

= 0.5

 At point A, where inflation is 1%, FED set the real interest rate at 1.5%

 At point B, where inflation is 2%, FED sets the real interest rate at 2%

 At point C, where inflation is 3%, FED sets the real interest rate at 2,5%

 The line going through points A, B and C is the monetary policy curve MP

WHY THE MONETARY POLICY CURVE HAS AN UPWARD SLOPE ?

THE TAYLOR PRINCIPLE

THE TAYLOR PRINCIPLE

The monetary policymakers raise nominal rates by more than any rise in expected inflation so that real

interest rates rise when there is a rise in inflation.

 In which higher inflation results in higher real interest rates.

 What would happen if monetary policymakers instead allowed the real interest rate to fall when inflation rose ?

 An increase in inflation would lead to a decline in the real interest rate, which would increase aggregate output, in turn causing inflation

to rise further, which would then cause the real interest rate to fall even more, increasing aggregate output

 Inflation would continually keep rising

and spin out of control

This is exactly what happened

in the 1970s, when the Federal

Reserve did not raise nominal

interest rates by as much as inflation rose, so that real interest rates fell

 Inflation accelerated to over 10%

Shift in the MP Curve

In common parlance, the FED is said to tighten monetary policy when

it raises real interest rates, and to ease it when it lowers real interest rates

• Changes in monetary policy that shift the monetary policy curve

 Autonomous changes

Autonomous tightening of monetary policy

• Lower inflation they could increase by 1% point, and so raise the real interest rate at any given inflation rate.

• It would shift MP upward by 1% from to, thereby causing the economy to contract and inflation to fall.

Autonomous easing of monetary policy

• Monetary policymakers would want to lower real interest rates at any given inflation rate, in order to stimulate the economy and also to prevent inflation from falling.

• It would shift MP downward by 1% from to

Autonomous tightening of monetary policy

• Lower inflation they could increase by 1% point, and so raise the real interest rate at any given inflation rate.

• It would shift MP upward by 1% from to, thereby causing the economy to contract and inflation to fall.

Autonomous easing of monetary policy

• Monetary policymakers would want to lower real interest rates at any given inflation rate, in order to stimulate the economy and also to prevent inflation from falling.

• It would shift MP downward by 1% from to

 Autonomous changes

 Automatic adjustments to interest rates

A central bank’s normal response (also known as an endogenous response) of raising real interest rate when inflation rise These

changes to interest rates do not shift the monetary policy cure, and so

cannot be considered autonomous tightening or easing of monetary policy

Instead, they are reflected in movements along the monetary policy curve

PART 3

Autonomous Monetary Easing at the Onset of the

2007-2009 Financial Crisis

When the financial criris started in August 2007, inflation was rising and economic growth was quite strong The FED began an aggressive easing, lowering the FED rate as shown in Figure 3

What does this tell us about effects on the monetary policy

curve ?

A movement along MP curve would have suggested that the FED would continue

to keep hiking interest rates because inflation was rising, but instead it did the opposite.

The FED pursued this autonomous monetary policy easing because the negative shock to the economy from the disruption to financial markets indicated that, despite current high inflation rates, the economy was likely to weaken in the near future and the inflation rate would fall.

THE AGGREGATE DEMAND CURVE

PART 4

THE AGGREGATE DEMAND CURVE

The relationship between the inflation rate and aggregate

output when the good market is in equilibrium.

 MP Curve demonstrates how central banks respond to changes in

inflation with changes in interest rate, in line with the Taylor

principle

 IS curve showed that changes in real interest rates, in turn, affect

equilibrium output.

 With these two curves, we can now link the quantity of aggregate

output demanded with the inflation rate, given the public’s

expectations of inflation and the stance of monetary policy

Deriving The Aggregate Demand Curve Graphically Figure 4

 In panel (a) Using MP : the

inflation rate rises from 1%, 2%, 3%,

real interest rates rise from 1,5% to 2%

to 2,5% We plot these points to create

the MP curve

 In panel (b) we graph the IS curve described in Equation Y = 12 - As the real interest rate rise from 1.5% to 2% to 2.5%, the equilibrium moves from point 1 to point 2 to point 3 and aggregate output falls from $10.5 trillion to $10 trillion to $9.5 trillion.

 In other words, as real interest rates rise, investment and net exports decline, leading to reduction in aggregate demand

Deriving The Aggregate Demand Curve Graphically Figure 4

 Panel (a) and (b) demonstrate that

as inflation rises from 1% to 2% to 3%,

the equilibrium moves from point 1 to

point 2 to point 3 in panel (c), and

aggregate output falls from $10.5

trillion to $10 trillion to $9.5 trillion.

The line that connects the three points in panel (c) is the aggregate

demand curve, AD.

Deriving The Aggregate Demand Curve Graphically Figure 4

 AD curve indicates the level of aggregate output corresponding to each of three real interest rates consistent with equilibrium in the goods market for any given inflation rate

 AD curve has a downward slope, because a higher inflation rate leads the central bank to raise real interest rates, thereby lowering planned spending, and hence lowering the level of equilibrium aggregate output

Deriving The Aggregate Demand Curve Algebraically

Factors That Shift the Aggregate Demand Curve

Movements along the aggregate curve describe how the equilibrium level of aggregate output changes when the inflation rate changes When factors besides the inflation rate change, however, the aggregate demand cure can shift

We first review the factors that shift the IS curve, and then consider other factors that shift the AD curve

Shifts in the IS Curve

Six factors cause the IS curve to shift It turns out that the same

factors cause the aggregate demand curve to shift :

Autonomous consumption Expenditure

Autonomous consumption Expenditure

Autonomous investment spending

Autonomous investment spending

Government purchases

Government purchases

Taxes Autonomous Autonomous net exports net exports Financial Financial frictions frictions

AD1 curve in panel (c).

 Suppose there is rise in, government

purchases by $1 trillion.

 Panel (b) shows that with the inflation

rate and real interest both held

constant at 2.0%, the equilibrium

moves from A1 to point A2, with

output rising to $12.5 trillion, so the

IS curve shifts to the right from IS1 to

IS2.

 The rise in output $12.5 trillion means that holding inflation and the real interest rate constant, the equilibrium in panel (c) also moves from point A1 to point A2, and so the AD curve also shifts frictions will cause the aggregate demand curve

to shift to right from AD1 to AD2.

Any factor that shifts the IS curve shifts the aggregate demand curve in the same

direction.

Shifts in the MP Curve

 FED decides to autonomously

tighten monetary policy by raising

the real interest rate by 1% point at

any level of the inflation rate

because it is worried about the

economy overheating.

 At an inflation rate of 2.0%, the real

interest rate rises from 2.0% to

3.0%.

 The MP curve shifts up from MP1 to

MP2 in panel (a).

FIGURE 6

Shifts in the MP Curve

 Panel (b) shows that when the

inflation rate is at 2.0%, the higher

interest rate results in the

equilibrium moving from point A1 to

A2 in the IS curve, with output

falling from $10 trillion to $9

Shifts in the MP Curve

 An autonomous tightening of monetary policy – that is, a rise in the real interest rate at any given inflation rate – shifts the aggregate demand curve to the left.

 An autonomous easing of monetary policy shifts the aggregate demand curve to the right.

PART 5

 When the Federal Reserve lowers the federal funds rate by providing more liquidity to the banking system, real interest rates fall in the short run;

 And when the Federal Reserve raises the federal funds rate by reducing the liquidity in the banking system, real interest rates rise in the short run

SUMMARY

1

 MP curve shows the relationship between inflation and the real

interest rate arising from monetary authorities’ actions Monetary policy follows the Taylor principle, in which higher inflation results in higher real interest rates, as represented by a movement

up along the monetary policy curve

 An autonomous tightening of monetary policy occurs when monetary policymakers raise the real interest rate at any given inflation rate, resulting in an upward shift in the monetary policy curve

 An autonomous easing of monetary policy and a downward shift in the monetary policy curve occurs when monetary policymakers lower the real interest rate at any given inflation rate

2

 The aggregate demand curve tells us the level of equilibrium aggregate output (which equals the total quantity of output demanded) for any given inflation rate

 It slopes downward because a higher inflation rate leads the central bank to raise real interest rates, which leads to a lower level of equilibrium output

 The aggregate demand curve shifts in the same direction as a shift

in the IS curve; hence it shifts to the right when government purchases increase, taxes decrease, “animal spirits” encourage consumer and business spending, autonomous net exports increase, or financial frictions decrease

 An autonomous tightening of monetary policy—that is an increase

in real interest rates at any given inflation rate—leads to a decline in aggregate demand and the aggregate demand curve shifts to the left

3

đó thị trường tiền

tệ cân bằng

Đường tổng cầu

là tập hợp các phối hợp khác nhau giữa mức giá chung và sản lượng hàng hóa tiêu thụ mà tại đó thị trường hàng hóa và thị trường tiền tệ cân bằng

Đường IS

Đường LM Đường AD

MÔ HÌNH IS - LM

MÔ HÌNH IS - LM

Từ IS –LM đến AD khi P thay đổi

• P0  cung tiền thực là M0/P0 tương ứng

đường LM0 Khi đó, đường IS-LM cân bằng

tại điểm E0, với mức thu nhập là Y0 (trên

đường IS) và trên đường AD thì ta có điểm

A (Y0, P0).

• P giảm P0  P1 thì cung tiền thực tăng 

LM dịch chuyển  LM1 Khi đó đường

IS-LM cân bằng tại điểm E1, với mức thu nhập

là Y1 (trên đường IS) và trên đường AD thì

ta xác định được điểm B (Y1,B1).

• Nối A và B  AD

ĐƯỜNG AD DỊCH CHUYỂN

Đường tổng cầu AD dịch chuyển khi các yếu tố tác động lên AD là các yếu tố ngoài giá (P)

Ví dụ: Thực hiện chính sách tài khóa mở rộng  Y  , đường AD dịch chuyển sang phải

ĐƯỜNG AD DỊCH CHUYỂN

Ví dụ: Thực hiện chính sách tiền tệ mở rộng, P không đổi  cung tiền thực tăng, đường

LM dịch chuyển sang phải  r   I   Y   đường AD dịch chuyển sang phải

ĐƯỜNG AD VÀ CÁC CHIỀU HƯỚNG CHÍNH SÁCH

Khi thực hiện chính sách tài khóa mở rộng (tăng G hoặc giảm T) hoặc chính sách tiền tệ mở rộng thì đường AD dịch chuyển sang phải Hình E2 cho thấy khi thực hiện chính sách tài khóa thu hẹp (giảm G hoặc tăng T) hoặc chính sách thắt chặt tiền tệ thì làm đường AD dịch chuyển sang trái.

Hình E1 Hình E2

ƯU ĐIỂM KHI SỬ DỤNG ĐƯỜNG MP TRONG MÔ HÌNH IS-MP

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