Macroeconomic Themes:31 Contribution of Monetarism in Macroeconomic Policy Supply of money is the determinant of the national income In the long run, the.

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Presentation transcript:

Macroeconomic Themes:31 Contribution of Monetarism in Macroeconomic Policy Supply of money is the determinant of the national income In the long run, the influence of money is primarily on the price level and other nominal magnitudes. Real output and employment are not determined by monetary factors. In the short run the supply of money does affect the output. Money is the dominant factor in causing cyclical fluctuations in output and employment in the short run. Private sector is inherently stable and instability is primarily the result of the government policy.

Macroeconomic Themes:32 Policy conclusions Stability in the growth rate of money supply is crucial for a stable economy. Monetarists favour a constant money growth rate policy rule rather than discretion. Fiscal policy does not have any systematic impact on real or nominal income.

Macroeconomic Themes:33 The basic mechanism of money supply

Macroeconomic Themes:34 The basic mechanism of money supply

Macroeconomic Themes:35 Money Supply

Macroeconomic Themes:36 Money Demand

Macroeconomic Themes:37 Friedman (1968) on Monetary Policy

Macroeconomic Themes:38 Natural Rate Hypothesis

Macroeconomic Themes:39 A brief story of monetary policy in the UK and the EU

Macroeconomic Themes:310

Macroeconomic Themes:311

Macroeconomic Themes:312 How does the Bank of England forecast the inflation?

Macroeconomic Themes:313 Transmission Mechanisms of Monetary Policy-Bank of Englands View

Macroeconomic Themes:314 B&W Figure 9.7 Percentage increase in prices on a year earlier Source: Inflation Report, Bank of England, November 2000 Bank of Englands Fan Chart

Macroeconomic Themes:315 Effects of Changes in the Rate of Interest

Macroeconomic Themes:316 Simple Policy Reaction Function: An Example of Interest Determination Rule

Macroeconomic Themes:317 Simple Policy Reaction Function: An Example of Interest Determination Rule

Macroeconomic Themes:318 B amplified cycle A smoother cycle Does Policy Work? Lags and demand management policy Time Output Business cycle

Macroeconomic Themes:319 Monetarists View on Impact of Monetary and Fiscal Policies

Macroeconomic Themes:320 Monetary Policy Instruments

Macroeconomic Themes:321 Interest Rate Determination Model: Actual and Predicted Series

Macroeconomic Themes:322 Prediction using a Simple Model

Macroeconomic Themes:323 References