ECON1102 Lecture Notes - Lecture 9: Open Market Operation, Monetary Policy, Unemployment
4 May 2018
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Tuesday, 1 May 2018
Week 9 - Central Banks and Monetary Policy
Key Issues !
-Reserve Bank of Australia!
-Instruments and Targets !
-Cash Rate as RBA’s Instrument!
-Channel System !
-Open Market Operations!
-Expectations Hypothesis !
-Monetary Policy Rules !
Central Banks (CB)
-Make operational decisions about monetary policy!
-Often have a considerable degree of autonomy or independence in implementing
monetary policy!
-Targets and Instruments !
-Monetary policy: Decisions and actions taken by the central bank to influence
short-run macroeconomic outcomes. !
-Targets: Final variables that CBs seek to influence !
-Inflation rate !
-Level of resource utilisation (e.g. output gap or cyclical unemployment rate)!
-CBs do not have direct control over ultimate targets.!
-Instrument: Monetary Policy Instrument
-Variable which the central bank can directly control!
-Eventually has a predictable effect on policy targets !
-Most CBs currently use a (very) short-term interest rate as their policy instrument. !
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Tuesday, 1 May 2018
RBA!
-Main functions:!
-Stability and efficiency of financial markets!
-Promoting efficient of payments system!
-Responsible for operation of monetary policy !
-RBA has an explicit inflation target (2-3% per annum) !
Headline vs Core Inflation!
-Headline = measured CPI (no adjustments) !
-Core/underlying inflation:!
-Use some procedure to try and remove the volatile, temporary fluctuations in
inflation.!
-Measure the longer-term (underlying) trends in inflation rate. !
-2 approaches:!
-remove historically volatile components of headline inflation e.g. energy
prices !
-eliminate a proportion of items with the highest and lowest rates of price
change!
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Tuesday, 1 May 2018
Monetary Policy Framework!
Policy Instrument (RBA) —-(transmission mechanism)—- Inflation Targets Output !
-Statements by RBA indicate it has a “flexible” Inflation Target. !
-Takes output into account in setting policy.!
-What is the instrument used by the RBA?!
-How does the RBA control its policy instrument?!
RBA’s Operating Procedures!
-An interest rate target is the monetary policy instrument used by the RBA.!
-actual cash rate = target cash rate (target = 1.5% as of Aug 16) !
Monetary Policy Decisions!
-11 monthly decisions on target cash rate per year!
-raise, lower or unchanged !
-Size of change is usually 25 basis points (100 basis points = 1%) !
-Increasing cash rate = contraction policy!
-Decreasing cash rate = expansionary policy !
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Document Summary
Week 9 - central banks and monetary policy. Often have a considerable degree of autonomy or independence in implementing monetary policy. Monetary policy: decisions and actions taken by the central bank to in uence short-run macroeconomic outcomes. Targets: final variables that cbs seek to in uence. Level of resource utilisation (e. g. output gap or cyclical unemployment rate) Cbs do not have direct control over ultimate targets. Variable which the central bank can directly control. Eventually has a predictable e ect on policy targets. Most cbs currently use a (very) short-term interest rate as their policy instrument. Rba has an explicit in ation target (2-3% per annum) Use some procedure to try and remove the volatile, temporary uctuations in in ation. Measure the longer-term (underlying) trends in in ation rate. Remove historically volatile components of headline in ation e. g. energy prices. Eliminate a proportion of items with the highest and lowest rates of price change.
