Policy Frameworks & Tools
7 important questions on Policy Frameworks & Tools
What are the two policy styles discussed in the lecture?
- Discretion: Decisions made on a case by case basis.
- Rules: Follow specific formulas like the Taylor Rule for consistency.
How do rules provide discipline in monetary policy?
- Decisions are predictable.
- They promote transparency.
- Protection against inconsistent or politically driven decisions.
What is the central bank "loss function"?
- Inflation stability
- Stable output
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Explain the Taylor Rule in monetary policy.
- Distance of inflation from the target.
- Difference between actual and target output.
- Higher inflation leads to increased rates.
What is the forecast-targeting approach in monetary policy?
- Setting rates currently to influence future inflation.
- Aiming for a target rather than reacting to real-time data.
What is the OCR corridor system utilized by central banks?
- Utilizing a band of lending/borrowing rates.
- Keeping short-term market interest rates close to the policy rate.
Describe New Zealand’s flexible targeting approach.
- A 2% inflation target.
- Allows for judgement calls during crises, e.g., rate cuts during COVID despite low inflation.
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