The basic targets and instruments of monetary policy, the concept of the money multiplier

Résumé du document

Medium-term price stability is widely accepted as the ultimate goal for monetary policy. This reflects two ideas. The first is that high rates of inflation distort decision-making, ultimately leading to slower economic growth, and the second is that monetary policy is the most effective instrument in influencing medium-term inflation outcomes. By pursuing a strategy that ensures that inflation does not distort decisions concerning investment, production and savings, monetary policy is best able to contribute to sustainable improvements in living standards.

Extraits

[...] ,control inflation rather than what it cannot do raise output growth, lower unemployment, increase external competitiveness through monetary policy. For inflation targeting to deliver these outcomes, there must exist a strong institutional commitment to make price stability the primary goal of the central bank. Inflation-targeting regimes also put great stress on the need to make monetary policy transparent and to maintain regular channels of communication with the public; In fact, these features have been central to the strategy's success in industrialized countries. [...]

[...] Increased transparency of the monetary policy strategy through communication with the public and the markets about the plans, objectives, and decisions of the monetary authorities; 5. Increased accountability of the central bank for attaining its inflation objectives. The list should clarify one crucial point about inflation targeting: it entails much more than a public announcement of numerical targets for inflation For the year ahead. This is especially important in emerging market countries because many of these countries routinely reported numerical inflation targets or objectives as part of the government's economic plan for the coming year and yet their monetary policy strategy should not be characterized as inflation targeting, which requires the other four elements for it to be sustainable over the medium term. [...]

[...] Since stability is a prerequisite of predictability, stability of the money multipliers is a contentious matter. For this ratio to exhibit stability it should be stationary; also both monetary base and money supply should be co integrated. An outline of the money multiplier model of money supply The salient characteristics of these models are the key roles of certain fixed ratios describing the portfolio behaviour of the banks and the public, in determining the relation between the quantity of money and the monetary base or other reserve aggregates controllable by the central bank. [...]

[...] A variety of monetary-policy frameworks is consistent with achieving this objective, although there has been a shift over recent years to forms of inflation targeting. Even in countries without an explicit inflation target, there is often a strong commitment to an implicit medium-term inflation objective. Further, countries that have chosen to fix their exchange rate have typically done so against a country with some form of implicit or Explicit inflation objective. While the move to inflation targets has made the ultimate goal of monetary policy more transparent, it has not meant that central banks have eschewed all attempts to mitigate cyclical fluctuations in output and employment. [...]

[...] The basic targets and instruments of monetary policy, the concept of the money multiplier Table of contents Introduction I. Targets of monetary policy II. Instruments of monetary policy III. The money multiplier Introduction Medium-term price stability is widely accepted as the appropriate ultimate goal for monetary policy. This reflects two ideas. The first is that high rates of inflation distort decision-making, ultimately leading to slower economic growth. The second is that monetary policy is the most effective instrument in influencing medium-term inflation outcomes. [...]