MONETARY POLICY This page intentionally left blank Monetary Policy GOALS, INSTITUTIONS, STRATEGIES, AND I N S T R U M E N T S Peter Bofinger in collaboration with Julian Reischle and Andrea Schachter OXFORD UNIVERSITY PRESS This book has been printed digitally and produced in a standard specification in order to ensure its continuing availability OXJORD U N I V E R S I T Y PRESS Great Clarendon Street, Oxford OX2 6DP Oxford University Press is a department of the University of Oxford It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan South Korea Poland Portugal Singapore Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc., New York © Peter Bofinger 2001 The moral rights of the author have been asserted Database right Oxford University Press (maker) Reprinted 2006 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover And you must impose this same condition on any acquirer ISBN 0-19-924057-4 Preface When I had to hold my first classes on monetary policy many years ago, I was amazed by the fact that there are almost no textbooks or comprehensive treatises on monetary policy As a result I wrote such a book, together with Julian Reischle and Andrea Schachter, which appeared in German in 1996 The positive assessment of this book by the academic community (Fase 1998) has encouraged me to consider an English version The last four years having been an extremely active and exciting time for monetary theory and policy, the outcome now differs in many respects from the original German text Nevertheless, it is still shaped by the same guiding principles While the focus is on policy-relevant issues, the book always tries to provide the necessary theoretical background In contrast to textbooks on 'Money, Banking, and Financial Markets', which normally describe and analyse only the domestic monetary policy, this book adopts a comparative approach which always includes the practices in the most important currency areas of the world With the high degree of international financial market integration, a student of monetary policy has to know more than what is going on in his or her own country As this book is the outcome of a long process of work, it is difficult to thank all those who have made it possible There is no doubt that I have greatly benefited from working as an economist at the Deutsche Bundesbank in the years 1985-90 In the last nine years, my students at Wiirzburg University inspired me with their critical questions on the available paradigms of monetary economics and gave me important feedback on draft material It was always very important to be able to discuss my ideas with my colleagues and assistants I am especially grateful to Christoph Harff, Oliver Hulsewig, Kai Pfleger, Julian Reischle, Andrea Schachter, Nicolas Schlotthauer, and Timo Wollmershauser Annemarie Reussner, Andre Geis, Heiko Miiller, and Christiane Klemp provided valuable technical assistance I would also like to thank Hans-Joachim Jarchow, Dieter Nautz, Lars Svensson, and the members of the Ausschuss fur Geldtheorie and Geldpolitik of the Verein fur Socialpolitik for insightful and useful comments on different parts of this book A very special note of thanks is due to many central banks, above all the Deutsche Bundesbank, the European Central Bank, and the Bank of Japan, which supported this book by providing data and other important information Wiirzburg P.B Author's note: All figures and tables (including the data used for their calculation) are available on the internet at www.monetary-policy.net All comments on the book should be mailed to Peter Bofinger at bofinger@t-online.de Contents List of figures List of tables List of boxes List of abbreviations Introduction xi xiii XV xvi xviii Part I Theoretical Fundaments of Monetary Policy What is money? 1.1 1.2 1.3 1.4 1.5 Introduction A microeconomic approach to the definition of money Defining money by its functions Defining money by its statistical properties The importance of a 'correct' definition of money Appendix 1.1 Definitions of money in the euro area, the United States, Japan, and the UK Appendix 1.2 The concept of (net) financial assets (flow of funds analysis) The demand for money 2.1 Introduction 2.2 The quantity theory of money and the Cambridge approach 2.3 The interest rate as a determinant of the money demand 2.4 The money demand Junction ofCagan 2.5 Wealth as a determinant of the demand for money 2.6 Empirical demand Junctions for money Appendix 2.1 Cointegration The money supply process: starting point of the transmission process 3.1 Introduction 3.2 Creation and control of the monetary base by the central bank 3.3 Consolidated balance sheet of the banking system and the supply of the money stock 3 11 14 15 15 17 20 20 21 23 32 32 34 38 40 40 41 46 viii Contents 3.4 The mechanistic multiplier process 3.5 A price-theoretic model of the money supply Appendix 3.1 A 'Poole analysis' for shocks Monetary policy transmission 4.1 4.2 4.3 4.4 4.5 4.6 Introduction Limited knowledge about the transmission process The quantity theory channel Interest rate channels Expectations channels (the 'Phillips curve') Summary Appendix The original Poole model Appendix 4.2 The concept of the 'price gap' 48 53 65 71 71 73 74 80 95 115 116 121 Part II Domestic Aspects of Monetary Policy The ultimate goal and the final targets of monetary policy 5.1 Introduction 5.2 The long-term view: only price stability matters 5.3 Inflation and output growth in the short run 5.4 Operational issues of a 'stability-oriented monetary policy' 5.5 Summary Appendix 5.1 Different variants of the nominal GDP targeting Appendix 5.2 Calculating the welfare losses of sub-optimal money holdings 127 127 131 148 153 160 161 162 The institutional framework for monetary policy I: 'rules versus discretion' 6.1 Overview 6.2 Rules versus discretion in monetary policy 6.3 The main arguments for limiting the discretion of central bankers 6.4 Rules that are imposed on central banks from outside 6.5 Summary of the traditional debate 6.6 Time inconsistency': a new argument in support of rules? Appendix The debate between the Banking School and the Currency School 164 164 165 165 169 174 174 202 The institutional framework of monetary policy II: the design of the central bank legislation 7.1 Overview 7.2 Independence of monetary policy 205 205 207 Contents 7.3 Accountability of central banks 7.4 Liability of incompetent central bankers Appendix 7.1 The functions of central banks and the technology of the payments systems ix 220 228 234 Strategies ('simple rules') for a stability-oriented monetary policy 8.1 The function of simple rules 8.2 "Simple rules', intermediate targets, and indicators of monetary policy 8.3 Monetary targeting 8.4 Inflation targeting 8.5 The Taylor rule: a rule for an operating target 8.6 A nominal GDP rule Appendix The yield structure as an indicator of the stance of monetary policy 240 240 245 248 257 268 274 282 The conduct of monetary policy by the world's major central banks 9.1 9.2 9.3 9.4 9.5 9.6 A comparison of the performance of central banks The monetary policy framework of the Deutsche Bundesbank The monetary policy framework of the European Central Bank The monetary policy framework of the Federal Reserve System The monetary policy framework of the Bank of Japan The monetary policy framework of the Bank of England 10 The instruments of monetary policy 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 Basic requirements Monetary base targeting v interest rate targeting Significance of individual monetary policy instruments Money market management by the European Central Bank Money market management by the Federal Reserve System Money market management by the Bank of England Money market management by the Bank of Japan The New Political Economy and monetary policy instruments 11 Seigniorage and inflation tax 11.1 Introduction 11.2 Monetary seigniorage and fiscal seigniorage 1 Macroeconomic stability and seigniorage financing 1 Optimal seigniorage 293 293 295 300 307 311 317 321 321 323 336 348 358 361 364 365 369 369 370 372 382 440 References Levine, R., and Renelt, D (1992), 'A Sensitity Analysis of Cross-Country Growth Regressions', American Economic Review, 82 (4): 942-963 Lipsey, R G (1960), 'The Relation between Unemployment and the Rate of Change of Money Wages in the United Kingdom, 1886-1957: A Further Analysis', Economics, 105: 1-37 Loef, H.-E (1989), 'The Case for Rules in the Conduct of Monetary Policy: A Critique on a Paper by B.T McCallum', Weltwirtschaftliches Archiv, 125: 168-178 Lohmann, S (1992), 'Optimal Commitment in Monetary Policy: Credibility versus Flexibility', American Economic Review, 82: 273-286 Lucas, R E (1972), 'Expectations and the Neutrality of Money', Journal of Economic Theory, 4(2): 103-124 — (1973), 'Some International Evidence on Output-Inflation Tradeoffs', American Economic Review, 63 (3): 326-334 — (1976), 'Econometric Policy Evaluation: A Critique', in The Phillips Curve and Labor Markets, Carnegie-Rochester Conference Series on Public Policy, Vol 1: 19-46 — (1994), 'On the Welfare Cost of Inflation', CEPR Discussion Paper no 394, London Lutz, F A (1941), 'The Structure of Interest Rates', Quarterly Journal of Economics, 55: 36-63 Lyons, R (2000), The Microstructure Approach to Exchange Rates, Cambridge and London: MIT Press; internet: www.haas.berkeley.edu/~lyons Maddala, G S (1992), Introduction to Econometrics, 2nd edn, New York: Macmillan Marshall, A (1923), Money, Credit and Commerce, London: Macmillan Marston, R D (1990), 'Pricing to Market in Japanese Manufacturing', Journal of International Economics, 29: 217-236 Marty, A., and Thornton, D (1995), 'Is There a Case for "Moderate" Inflation?' 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Bank of Japan, Monetary and Economic Studies, (2): 9-30 Index of Names Akerlof 160 Alesina 217-8 Argy 317,318,389 Auernheimer 176 Axelrod 189 Backus 191, 193 Bailey 137 Ball 37 Barnett Barro 142, 145-6, 175-6, 180, 186, 188-9 Baumol 24,27-31,345 Bean 148,274 Berk 292 Bernanke 86,90,91, 156, 160,212-13,229, 258-60, 262, 265, 297-8, 304, 307-8 Bernholz 170 Blackburn 174-5, 180, 183, 186-8, 192 Blanchard 78 Blenck 341,349,359,365 Blinder xvii, 73, 94, 96, 166, 175, 199,270 Bloomfield 170,238 Board of Governors 358 Bockelmann 352 Bodin 75 Bohm-Bawerk 283 Bofmger 170,409,419,421,423 Bordo 170 Borio 321,360,364,368 Bradley 148 Briault 207, 209, 268 Brunner xvii, 12, 249 Bruno 201,378,380 Buiter 224-5, 228, 230, 307 Cagan 32,370,377-9,381 Calvo 185,423 Campbell 288 Canzoneri 180 Cantillon 21 Capie 238 Caplin 138 Castello-Branco 215 Cecchetti 85,92 Christensen 174-5, 180, 183, 186-8, 192 Clarida 300,308-9 Coenen 35,36,37 Cohen 140 Collignon 415 Cooley 137 Corker 424 Cornwall 146 Croushore 279 Cukierman 174, 177, 180, 184, 187, 200, 208, 215,217 Dale 85 Davis 246 Debelle 209, 269 Diewert 154 Divisia DeGrauwe 171, 178,201 DeGregorio 145 DeHaan 217,374 DeLong 217 Dopke 108 Dornbusch 383,404 DrifTill 135-6, 191, 193 Dueker 279 Duisenberg 221,224,254,304 Edey 157 Eichengreen 410,421,423 Eijffmger 217,390 Einzig 404 Emminger 397 Engle 38 Ericsson 35-6 Estrella 282 Eucken 166 Fase v Feldstein 129, 141 Pels 252 Fischer, Stanley 78, 132-33, 138, 145, 189, 206-7, 209, 212-3, 215, 285, 378-80, 383 Fisher, Irving 21, 32, 105, 134, 155 Fratianni 168,233 Friedman xix, 5, 12, 32-3, 73, 78, 94, 99, 101, 116, 135, 166-7, 169, 188, 249, 250, 383, 410 Froot 395, 398-9 Fuhrer 104, 110 Fullarton 203 Furubotn 176 Gali 110 Geraats 224 Gerlach 283,302,307,416 Gertler 86,91, 110,300 Giannini 234, 236 Giavazzi 409 Gibson 286 Gigerenzer 243, 245 Gilchrist 86 448 Index of names Gujarati 38 Goodfriend 135,268,309,357 Goodhart 114, 157,356 Gordon 96, 175-6, 180, 186, 188-9 Granger 38 Greenspan 121,294,308-9 Grier 144 Grilli 209,210,215-7 Grimes 145 Gros 171,374,415 Gylfason 145 Hagen, von 252 Haldane 85, 207, 234, 242, 261, 263 Hall 274,278,279 Mailman 120 Hanke 171 Hansen 137 Hardy 341 Hicks 4,289 Hochreiter 415 Hoffmaister 312 Hoover 78 Hume 78 Isard 401,416,422 Issing 73, 114, 208, 210, 223-4, 229, 245-6, 373 Jansen 148 Jarchow 178, 189 Jevons 11,283 Johnson 405 Jonsson 265 Judd 279 Kashyap 83,86 Keynes 21, 23-5, 48, 83, 108, 129, 286, 370, 382 King 72, 101, 158, 278, 337, 361, 363 Klitgaard 315 Kopits 415 Koren 138 Kormendi 145-6 Kouri 389 Kozicki 274 Kreps 183 Krugman 405 Kydland 175 LafTer 378 Laidler 132, 160 Lane 265 Lange 134 Langfeldt 109 Laplace 245 Larrain 141 Laurens 340, 348 Leibniz 245 Leidermann 258 Levin 108, 145-6, 274 Lloyd 202 Locke 21 Loef 279 Lohmann 195,212 Longfield 202 Lucas 107, 111, 136-7 Lyons 422 Malynes 404 Mankiw 278-9 Marshall 21-2 Marston 315 Marty 379-80 Masson 421,423 Mayer 252 Mayes 416 McCallum 53, 65, 94, 132, 135, 272, 274, 279-81,327,398 McCulloch 202 McKinnon 315 Meade 274 Meguire 145-6 Meltzer 12,78,95-6 Menkhoff 342 Mihov 309 Mill 21,203,283 Minford 318 Mishkin 282,298,307,415 Miyanoya 365 Modigliani 132, 138,289 Monissen 285 Moore 104, 110 Mori 316 Motley 145,279 Moutton 159 Mundell 410 Mussa 420 Muth 107 Neumann 180,216,246,248,252,378 Niehans xvii Norman 202 Ohno 315 Okina 313 Oliner 86, 93 Olivera 141 Orphanides 273,309 Osborne 1,4, 14 Paasche 155 Pagano 409 Panco 283 Parkin 132 Peel 204,235 Persson 195, 197, 233 Petty 21 Phelps 99, 383 Phillips 95 Index of names Pigou 21-2 Poole 65,94, 116 Popper 15 Prescott 175 Radelet 415 Rees 168 Reinhard 423 Reinhart 423 Reischle Renelt 145-6 Ricardo 283 Richter 97, 176 RogofT 189, 191, 197-8, 207, 209 Romer 272 Roth 318 Rudebusch 86, 93, 243, 269, 275 Sachs 141,415 Samuelson 98 Saving 246-7 SchSchter 36, 37, 297-8, 300 Schaling 217 Schinasi 313 Schnabel 307 Schnadt 359, 366 Schumpeter 75 Schwartz 11, 73, 167, 170, 202, 412 Seitz 342 Shapiro 159 Shigehara 275 Siklos 217,265 Simon 107 Simons 166-7 Smets 80,416 Smith 21,283 Solow 98 Stein 86 Stiglitz 93, 168 Stock 129 StoB 56 Strotz 175 Sturm 217 Sturzenegger 423 Summers 160, 217-8 Sutch 289 449 Suzuki 316 Svensson 80, 82, 109, 147, 157, 228, 240, 243-5, 248, 258, 259-60, 262, 264-5, 300, 307,321,414 Swinburne 215 Tabellini 195, 197,233 Tanzi 141 Taylor 80, 93, 102, 242, 268-9, 274, 278, 309 Thaler 395, 398-9 Thoronton 379-80 Thygesen 171,415 Tobin 4, 5, 24, 26-9, 147,178, 274, 345, 383 Todd 243,245 Tooke 203 Torrens 202 Tullock 145 van den Heuvel 265 van Bergejtfk 292 Vega 35-7 Verhagen 390 Vickers 242,265 Viren 416 Volcker 308 Wagner 275 Waller 231, 233 Walras 95 Walters 171 Walsh 1,80, 103,231,233-4 Warde 202 Weiss 93 Weizsacker, von 274 Whitehead xvii Wicksell 78,83,285 Wilcox 159 Williamson 414,416 Willms 406 Winckler 415 Winder 36 Winkler 223, 225 Woodford 80, 135,267 Wynne 155-6 Yeyati 423 Index of Subjects absorption facility 331-2,348 accountability 206, 220, 305 adaptive expectations 379 American auction 340 Asian crisis 415 asset price bubble asset specificity 176 asymmetric information 168 Australia 241 Austria 267,415 balance sheet channel 90-3, 115 Bank Charter Act 235 Bank of Australia 260 Bank of Canada 216, 220, 260 Bank of England 9, 159, 202-4, 216, 220, 226, 235, 237-8, 241-2, 257, 260-5, 267, 294-5, 307, 317-20, 322, 337, 340, 360-64, 366-7 Act 211 bank of issue 206,234 Bank of Japan 9, 216, 219-20, 226, 241, 295, 311-7,343-4,364-7,412 Act 211 Banking School 165,202-4,235,330 Banque de France 220, 238, 397 Baumol-Tobin model 345 Belgium 415 bias: new goods 59 outlet substitution bias 59 product substitution 59 quality 159 bounded rationality 107-8 borrowed reserves 359 Boskin Report 59 Brazil 416 Bretton Woods system 170, 217, 238, 249, 395, 397,415,420 broad credit channel 93 broadly based assessment 301,304-7 Bundesbank siehe Deutsche Bundesbank bureaucracies 366 Canada 156,212-3,219,241 cash balance approach 21 cash holding ratio 50, 325 central bank: balance sheet 41 constitution 205-35 independence 207-21 chain store paradox 192 Chile 416 China 415 collateral 330,340,351 Colombia 416 Commission of the European Communities 137, 211 commitment technologies 201 commodity reserve currency 66 communication technologies 225 Consensus Economics 223, 266 conservative central banker 207-8 consolidated balance sheet of the banking system 46-8 consumer surplus 133 contemporaneous reserve requirement 342 convertibility 203 core inflation 56-7 Corset 318 costs of inflation 132, 144 Council of Economic Experts 297 Cournot solution 376 crawling peg: active 414-6,419 passive 414-6, 419 credibility 114,176,200,305 credit: adjustment 360 extended 360 seasonal 360 supply 55-8 view 86,96 creditor/debtor hypothesis 43 currency: board 171-3,215,369,411,415 reform 201 Currency School 165,202-4 current account 18 Czech National Bank 415 Czech Republic 418,421,424 demand for central bank money 63 demand shock 254-5 Denmark 7,415 deposit facility 329, 351, 389 Deutsche Bank Research 224 Deutsche Bundesbank 14, 109, 152, 158, 170,212,225-7,241,249-53, 256, 264, 293-300, 307, 322, 328, 339, 346, 348, 355, 362, 397,416 Deutsche Reichsbank 237 Deutschmark 314,415,420 Index of subjects discount: credit 359 instrument 364 discretion 165 disinflation 183, 201 divisia index 6-9 dollarization 12 double coincidence of wants 1 Dutch auction 340 East German mark 201 eclectic approach 306-5 ECU (European Curreny Unit) 214, 320, 395, 41 electronic cash 322 EMS (European Monetary System) 170, 298, 322,339,419,420 ERM see EMS Estonia 415 Estonian Kroon 72 euro 13 area 8, 342, 398, 410 European Central Bank (ECB) 9, 14, 159, 206, 211, 216, 219-21, 223, 241, 248, 250, 256, 260, 300-7, 330, 342-5, 348-58, 366-7 euromarket 323 European Monetary System see EMS European Monetary Union 201 European Parliament 211 European System of Central Banks (ESCB) 5, 42, 226 Eurostat 156 Eurosystem see European System of Central Bank empirical demand functions 34 error correction mechanism (ECM) 38 exchange rate: fixed 418-22 flexible 404,422-3 floating 411 mechanism (ERM) see EMS targeting 242,416-9,422-8 excess reserves 43 expectations: adaptive 106-7 channel 71,95-115, 142, 152,266,409,414 extrapolative 105 rational 107 theory of interest rates 288-90, 332, 357 export performance 313 facility: absorption 331-2,348 deposit 329,351,389 marginal lending 350 overdraft 330 refinancing 328,348 standing 330, 336, 362, 364 federal funds rate 358 Federal Open Market Committee 358 451 Federal Reserve 219, 226, 268, 294-5, 307-11, 328, 343-4, 347, 358-61, 366-68, 420 Act 129, 165,210,225 Board 216 System 216,220,237,241,269 fiat: currencies 238-9 money 369 financial: accelerator 90 innovation 319,322 Finland 311 fiscal seigniorage see seigniorage Fisher equation 285 fixed rate tender 340, 346, 354-6 flow of funds anaysis forecast based rule 273 foreign exchange market interventions 60, 388 forward discount puzzle 395, 399 forward premium 394 forward rate 392 France 415 Friedman rule 279 fan-chart 261 GDP: deflator 155 nominal targeting 161/327 nominal rule 255, 274 Germany 347, 395 Gibson Paradox 286 Gold standard 70, 238, 369 Great Depression 252 Greenspan: Volcker-Greenspan phase 308 harmonized index of consumer price (HICP) 54 Hartwahrungspolitik 415 helicopter money 79-80 heuristic 165,243,244 Hong Kong 415 Hungary 415,423 hyperinflation 12,32,378 hybrid targeting 161 IMF see International Monetary Fund income: elasticity 30,34,36 nominal targeting 242, 309 inconsistency triangle 391, 411 independence: economic 210 goal 209-13 instrument 210-2,213-5,258 personal 210 political 209,215-6,299 indicators 245 leading 245 Indonesia 415 452 Index of subjects inflation: bias 182,206,220 control targets 212 forecast 225 targeting 259 performance 293 projection 260, 305 rate: normative 250 Report 260, 267 targeting 57-8, 242, 257-68, 307, 320, 326 tax 369-73 instrument independence see independence instruments of monetary policy 321-68 interbank money market 324 interest parity: covered (CIP) 393 uncovered (UIP) 391-403 purchasing power parity (PPP) 387, 403-9 interest rate: channel 73,80-95, 114,414 ceilings 322 elasticity 30, 34 long-term 283-7 natural 285 smoothing 115,309,350,355^ targeting 60, 63, 65, 323-8, 337, 341, 348 intermediate lag 83 intermediate targets 245 internal rate of return 84 International Gold Standard see Gold Standard International Monetary Fund 54, 70 intervention potential 390 inventory model 27 Israel 416 Italian lira 409 Japan 294, 325, 342, 347, 398, 410, 411 Korea 415 marginal efficiency of capital 83 marginal lending facility see facility matched sale-purchase transactions 359 McCallumrule 274,279-81,321 means of payment 11 Medium-Term Financial Strategy 318 menu costs 95,96, 138 Mexico 421 minimun reserves 322, 341-7, 352-4, 362 minutes 225, 228 misalignments 405 money: 'aggregation problem' 'classification problem' definition demand for 20, 252-3, 256 fiat 369 functions 4, 11-14 market interbank 58-60, 323-6 macroeconomic 58 multiplier 48, 50-3, 327, 347 overnight 324 stock Ml 5, 16 stock M3 5, 16 velocity 22 view 82-86 monetary: base 4,318 base targeting 60, 62, 323-8, 333-6, 340, 348 conditions index (MCI) 416 policy transmission 71 - 24 seigniorage see seigniorage targeting 117, 200, 242, 248-57, 262, 295-9, 301-4,311,316,318 union 201 wealth 12 Monetary Policy Committee 216,361 Mundell-Fleming model 391,419 Laffer curve 378 lagged reserve requirement 342 Laspeyres index 54 law of one price 404 lender of last resort 172, 206, 234, 235, 236-7 liquidity policy 328 liquidity preference 23 long and variable lags 74 longer-term refinancing operations 357 long-term interest rate see interest rate loss function 28 Luxembourg 347,415 Nash: equilibrium 189 solution 183, 192 (net) financial assets Netherlands 267,415 neutral real short-term interest rate 270 new institutional economics 96, 176 new political economy 365-8 New Zealand 211, 213, 219, 229, 234, 241 nominal income 129,151 target 152 normative inflation rate 250 note issue 235 numeraire 13 maintenance period 352 Malaysia 415 managed floating 214,422-8,331 market-conforming instruments 348 market segmentation 288-90 Okun'sLaw 162 Olivera-Tanzi effect 141 one-way bet 397 open-market operations 328, 333, 336-41, 359, 363-5 Index of subjects opportunity cost seigniorage see seigniorage optimization under constraints 243-4 outcome-based rule 273 output gaps 131 outright open-market see open-market operations outside lag 74 overbidding 356 overdraft facility see facility overlapping generations 79 Paasche index 55 performance contracts 230-4 Phillips Curve 95-115, 143, 177-80, 188,382 modified 97-9 new 102-5 expectations-augmented 99- 102 Poland 415,423 policy rate 349 Policy Targets Agreement 211, 229 political business cycles 168 Poole model: modified 65-70 original 116-21,254 potential formula 250-2 potential output 250, 252 precautionary motive 24 price: index 153-7 level targeting 157-8 rigidity 95 gap 121-4 pricing-to-market 315,405 principal-agent problem 168-9 prisoner's dilemma 184 production potential see potential output P-star 120-3 purchasing power channel 414 quantity theory 15, 21-3, 72, 74-80, 249, 253 channel 114 Radcliffe Report 80 random walk 422 rationality 243 unbounded 243 rational expectations 182,183 real bills doctrine 203 reference value 301-2 refinancing see facility regulation q 322 renumeration of reserve holdings 353 repurchase agreements 348, 354-7 reputational equilibrium 189 Reserve Bank of New Zealand 56, 6, 220, 229, 261 reserve requirement: contemporaneous 342 lagged 342 minimum 342, 346 Ricardo-Balassa-Samuelson effect 387, 406-8 453 risk premium 144, 393, 416 rule: 165 explicit 243 flexible 197 Friedman 279 forecast- based 273 implicit 243 inflation targeting 260^ McCallum 274,279,321 nominal GDP 255, 274 simple 240-9,305,321 targeting 240, 244 Taylor 93, 171, 268-72, 279, 307 outcome-based 273 rules versus discretion 64-202 Russia 138 sacrifice ratio 250 Salamanca School 404 satisficing 244 securities repurchase agreements see repurchase agreements seigniorage: 75, 134, 176,238,369-83 fiscal 370-2 maximization 374-82 monetary 370-2 opportunity cost 374 optimal 382-3 self-liquidating element 334 semi-interest rate elasticity 32, 34 shoe leather costs 36 simple-sum aggregates Slovenia 423,424 social welfare function 28, 77 speculative motive 24 stability-oriented monetary policy strategy 301 stabilization programmes 79 Stackelberg equilibrium 183 standard: for measuring increases in wealth of deferred payments 13 standing facility see facility sterilization 45, 322, 332, 335 costs of 390 potential 331,346,351,388,390 sterilized interventions 332 store of value 12 structural operations 357 sub-optimal money holdings 133, 162 supply shock 255 surprise inflation 181,381 Survey of Professional Forecasters 223, 266 Sveriges Riksbank 216, 220, 238 Sweden 311 system repurchase agreements 359 targets: final 387 intermediate 245-8, 387 operating 387 454 Index of subjects Taylor rule 98, 171, 268-74, 279, 299-300, 307-8,310,313,319,327 tender: fixed rate 340, 346, 354-6 variable rate 340, 354-6 Thailand 415 Tier: asset 350 asset 351 time inconsistency 74-6, 207 Tobin'sq 85/ tit-for-tat rule 188 Thailand 421 transaction motive 24 transparency 221-8,305 Treasury bills 339 trigger mechanism 188 uncollateralized overnight call rate 364 uncovered interest (rate) parity see interest parity unemployment: natural rate 101 non-accelerating inflation rate 101 United Kingdom 213, 219, 241, 311, 317, 325, 347, 398 United States 325, 337, 339, 342, 347, 395, 398, 410 unit of account 12 user costs variable rate tender see tender vault cash 360 velocity 252 volatility 405 Volcker: pre-Volcker phase 309 Volcker-Greenspan phase 309 voting behaviour 228 welfare costs of the inflation 162,383 withdrawable term system repurchase agreements 359 working balances 44, 324, 345, 362 yield curve 282-92 zero interest rate policy 312, 316, 364 .. .MONETARY POLICY This page intentionally left blank Monetary Policy GOALS, INSTITUTIONS, STRATEGIES, AND I N S T R U M E N T S Peter Bofinger in collaboration with Julian Reischle and Andrea... The monetary policy framework of the Deutsche Bundesbank The monetary policy framework of the European Central Bank The monetary policy framework of the Federal Reserve System The monetary policy. .. Political Economy and monetary policy instruments 11 Seigniorage and inflation tax 11.1 Introduction 11.2 Monetary seigniorage and fiscal seigniorage 1 Macroeconomic stability and seigniorage financing