Chapter 8 Monetary Policy 8.1 Definition of Monetary Policy Government policy concerning money and credit conditions, especiallytherate of growth in the money supply and the level of interest rates.. Monetary policy include three aspects: vobjectives of policy vtools to realize the objectives vthe anticipated effects of policy 8.2 Goals of Monetary Policy 8.2.1 full employment As the primary goal of monetary policy, full employment is generally defined as meaning that jobs are readily available on reasonable terms for all who able and willing to work. Full employment does not mean that there is no unemployment. frictional unemployment unemployment rate(失业人数与愿意就业 的劳动力之比) What influences will the high level of unemployment rate produce? 8.2.2 Stability of the price level Stability of the price level does not mean unchanged individual prices. Price level stability means keeping average prices, as measured, say ,by wholesale and consumers price indexes, from fluctuating at all, or from fluctuating beyond narrow limits. What factors will cause the change of the price level ? The changes in the source of raw material, variations in the efficiency of capital and labor, the introduction of new products, the swings of popular fancy from one product to another, material variations in the supply of some goods because of weather conditions, and the like. It is widely recognized that a stable price level does not ensure full employment. Stability of the price level can obtain during periods of widespread unemployment, and the mere situation of stability might make little or no contribution toward an expansion in employment. A sharp decline in prices due to an insufficient quantity of money ,for example, would certainly result in a rapid growth of unemployment , for the narrowing of profit margins and the appearance of operating losses would surely lead enterprisers to curtail their productive activities. vEffects of forced savings vEffects of income re-distribution vEffects of asset portfolio adjustment vEconomic and social crises Three main indexes are used to measure the change of price level. q consumption price index(消费物价指数) q wholesale price index (批发物价指数) q GNP Deflator (GNP平减指数) 8.2.3 Economic growth A sustained high rate of economic growth. Economic development 8.2.4 balance of ( international ) payments v definition of balance of payments: A record of payments that one country makes to and receives from all other foreign countries. vitems of balance of payments (sheet ) Current Account Balance of trade(visible trade ) Trade Balance / favorable balance of trade /unfavorable balance of trade Balance of service(invisible trade ) Balance of Transfer Unilateral Transfer , Unrequited Transfers Capital Account short-term capital long-term capital -Balancing Account Official Reserves o Gold reserves o Non-gold reserves Foreign exchanges reserves Reserve Position in the Fund Allocation of Special Drawing Rights, SDR Errors and Omissions The importance of adjustment of balance of payments vRelationship between international payments and domestic economic development vChannels of interconnection between domestic and foreign economies Channels of interconnection between domestic and foreign economies q Foreign trade q Capital flow Plaza Agreement “广场协议” 8.2.5 Six objectives of the Federal Reserve: qstability of the price level qhigh level of employment qeconomic growth qstability of interest rate qstability of financial market qstability of foreign exchange market 8.2.6 The choice and use of objectives of monetary policy in China in recent years 单一目标论 双重目标论 多重目标论 8.2.7. Targeting of Inflation 通货膨胀目标制 8.3 Reconciliation and conflict of different goals of monetary policy 8.3.1 Reconciliation of goals of monetary policy Economic growth and full employment 8.3.2conflict of different goals of monetary policy vConflict between stability of price level and full employment Philips Curve vConflict between stability of price level and economic growth vConflict between economic growth and balance of payments How should we deal with the conflict among the objectives? 8．4 Optional tools of monetary policy Direct control over consumer credit Direct control over estate credit Direct control over estate credit of security market Preferential interest rate Advanced deposit 8．5 Direct control over credit 利率最高限额 信用分配 规定商业银行的流动性比率 Direct intervention 8.6 Indirect instruction on credit 道义劝告（Moral Suasion） 窗口指导 8.7Transmission mechanism and intermediary targets of monetary policy (货币政策的传导机制和中介指标) 8.7.1 Transmission mechanism of monetary policy Keynes school’s theory of transmission mechanism of monetary policy M→r→I→E→Y M is money supply r is interest rate I is investment E is total expenditure Y is total income The main link in this course is interest rate: The adjustment of the money supply firstly affects the alteration of interest rate and then makes the investment and total expenditure change. Keynes school’s theory of transmission mechanism emphasizes or pays special attention to the link “interest”. Monetarism’ theory of transmission mechanism of monetary policy M→E→I→Y M is money supply I is investment E is total expenditure Y is total income M→E means that the changing of money supply directly affects the expenditure. E→I means the course of the changed expenditure being used in investment. Y is nominal income, which is equal to the product of price and output. qMonetarism’ theory of transmission mechanism stresses the direct effect of money supply in the course. q Monetarism’ school thinks that interest rate does not play important role in monetary transmission mechanism 8.7.2 Choice of intermediary targets of monetary policy Intermediary targets of monetary policy interest rate targets amount of money supply excessive reserve and monetary base criterions of choice Measurability (可测性) Controllability (可控性) Relatedness to goal（相关性） 8.8 Effects of monetary policy 8.8.1 time lag of monetary policy v inside time lag recognition lag decision lag v intermediate lag v outside time lag (impact lag) 8.8.2 rational expectation 8.8.3 velocity or rate of turnover of money 8.8.4 financial reform and financial innovation 8.8.5 political factors 8.9 The accordance of monetary policy and fiscal policy The accordance of monetary policy and fiscal policy is very important. 8.9.1 differences between monetary policy and fiscal policy 8.9.2 Types of The accordance of monetary policy and fiscal policy q双松政策 q双紧政策 q一松一紧