Lecture 27 What Should Central Banks Do? Monetary Policy Goals, Strategy, and Tactics.

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Lecture 27 What Should Central Banks Do? Monetary Policy Goals, Strategy, and Tactics

The Price Stability Goal Low and stable inflation Inflation Creates uncertainty and difficulty in planning for future Lowers economic growth Strains social fabric Nominal anchor Time-inconsistency problem

Other Goals of Monetary Policy High employment Economic growth Stability of financial markets Interest-rate stability Foreign exchange market stability

Should Price Stability be the Primary Goal? In the long run there is no conflict between the goals In the short run it can conflict with the goals of high employment and interest-rate stability Hierarchical mandate Dual mandate