EC250 Lecture Notes - European Central Bank, Real Interest Rate, Quantitative Easing
Document Summary
Little difference in price change with moderate inflation and deflation. Central bank can lower the real interest rates more. Borad of bank appointed longer than government term. Central bank manages monetary policy without interference from the elected officials. Time consistent: if the rest of the plan is unchanged. Time inconsistent: if the rest of the plan changes. Examples of time inconsistent: building restrictions in hurricane, taxation of fixed assets (capital cannot run away but leisure can, exams, monetary policy. Example zimbabwe where the government does not care about the future of the country. Central bank has incentive to raise inflation above what is expected. =lower real interest rate = higher demand = lower unemployment. =central bank follows discretionary policy = people will not believe promises of low inflation. Goal = central bank to have low inflation. Policy makers are evaluated on basis of inflation performance. Example: professor makes you believe that there will an exam which stimulates you to study.
