17.3 Central Bank Targets #Notebook

17.3 Central Bank Targets #Notebook

TOOLS → SET TARGET → SET GOAL

Time inconsistency problem, The inability over time to follow a good plan consistently. Like a wayward dieter or a lazy student, they overshot their targets time and time again. 

Monetary targets did not always equate to the goals. There are long lags between policy implementation and real-world effects. The situation is changing over time, and nearly impossible to predict. 

Central banks cannot control both an interest rate and a monetary aggregate at the same time. 

Central banks can control interest rate or MS, but not both

If the central bank leaves the supply of money fixed, changes in the demand for money will make the interest rate jiggle up and down. It can only keep interest rates fixed by changing the money supply. However, with the monetary supply moving round and round, up and down, it became difficult to hit monetary targets.

If central banks adopt explicit inflation targets, the result will be lower employment and output in the short run. As inflation expectations spread, an extended period begins, and then high employment.

Inflation targeting frees central bankers to do whatever it takes to keep prices in check, to do it with more useful information, not just monetary statistics. That makes the policies more sensible to the public because anyone can feel it.

However, if a country like New Zealand, its legislature can oust what central banker is doing by law, it makes the central bank less independent. But, if it legislature uses the punishment only to oust incompetent or corrupt central bankers, it should be salutary. 

Reference

Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation. Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license.