Monetary Policy Strategy

561 Pages·2007·2.879 MB·English

by  Frederic S. Mishkin

Monetary Policy Strategy
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Monetary Policy Strategy

Monetary Policy Strategy
Frederic S.Mishkin
TheMITPress
Cambridge,Massachusetts
London,England
62007MassachusettsInstituteofTechnology
Allrightsreserved.Nopartofthisbookmaybereproducedinanyformbyanyelectronicormechanical
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MITPress booksmaybepurchasedat specialquantitydiscountsfor businessor salespromotional use.
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MITPress,55HaywardStreet,Cambridge,MA02142.
ThisbookwassetinTimesNewRomanandSyntaxon3B2byAscoTypesetters,HongKongandwas
printedandboundintheUnitedStatesofAmerica.
LibraryofCongressCataloging-in-PublicationData
Mishkin,FredericS.
Monetarypolicystrategy/byFredericS.Mishkin.
p. cm.
Includesbibliographicalreferencesandindex.
ISBN978-0-262-13482-8(hardcover:alk.paper)
1.Monetarypolicy. I.Title.
HG230.3M57 2007
339.503—dc22 2006033821
10 9 8 7 6 5 4 3 2 1
To Laura and Matthew

Contents
Preface ix
1 HowDidWeGetHere? 1
FredericS.Mishkin
I FundamentalIssuesintheConductofMonetaryPolicy 29
IntroductiontoPartI 31
2 WhatShouldCentralBanksDo? 37
FredericS.Mishkin
3 TheTransmissionMechanismandtheRoleofAssetPricesinMonetaryPolicy 59
FredericS.Mishkin
4 TheRoleofOutputStabilizationintheConductofMonetaryPolicy 75
FredericS.Mishkin
5 CanCentralBankTransparencyGoTooFar? 89
FredericS.Mishkin
6 IsThereaRoleforMonetaryAggregatesintheConductofMonetaryPolicy? 109
ArturoEstrellaandFredericS.Mishkin
7 RethinkingtheRoleofNAIRUinMonetaryPolicy:ImplicationsofModelFormulation
andUncertainty 133
ArturoEstrellaandFredericS.Mishkin
II MonetaryPolicyStrategyinAdvancedEconomies 159
IntroductiontoPartII 161
8 CentralBankBehaviorandtheStrategyofMonetaryPolicy:ObservationsfromSix
IndustrializedCountries 165
BenBernankeandFredericS.Mishkin
viii Contents
9 InflationTargeting:ANewFrameworkforMonetaryPolicy? 207
BenBernankeandFredericS.Mishkin
10 InternationalExperienceswithDifferentMonetaryPolicyRegimes 227
FredericS.Mishkin
11 WhytheFederalReserveShouldAdoptInflationTargeting 253
FredericS.Mishkin
III MonetaryPolicyStrategyinEmergingMarketandTransitionEconomies 263
IntroductiontoPartIII 265
12 InflationTargetinginEmergingMarketCountries 271
FredericS.Mishkin
13 MonetaryPolicyStrategiesforLatinAmerica 279
FredericS.MishkinandMiguelA.Savastano
14 MonetaryPolicyStrategiesforEmergingMarketCountries:LessonsfromLatin
America 309
FredericS.MishkinandMiguelA.Savastano
15 InflationTargetinginTransitionEconomies:ExperienceandProspects 345
JiriJonasandFredericS.Mishkin,withcommentbyOlivierBlanchard
16 ADecadeofInflationTargetingintheWorld:WhatDoWeKnowandWhatDoWe
NeedtoKnow? 405
FredericS.MishkinandKlausSchmidt-Hebbel
17 TheDangersofExchange-RatePegginginEmergingMarketCountries 445
FredericS.Mishkin
18 TheMirageofExchange-RateRegimesforEmergingMarketCountries 465
GuillermoA.CalvoandFredericS.Mishkin
IV WhatHaveWeLearned? 485
IntroductiontoPartIV 487
19 EverythingYouWantedtoKnowaboutMonetaryPolicyStrategy,butWereAfraidto
Ask 489
FredericS.Mishkin
Sources 537
Index 539
Preface
Although my father fought in Europe in World War II, the central event in his life
was the Great Depression. When I expected (and hoped) that he would regale us
with stories about his war experience, he instead told us about life in the 1930s and
how devastating the collapse in the economy had been to him and his family. This
experience iswhat set meon the path to becoming an economist. My father’sstories
made me realize how large an impact the state of the economy could have on peo-
ple’s lives, and I wanted to understand how better policies could lead to improved
outcomes for the aggregate economy.
WhenIstartedtakinggraduatecoursesatMITin1972(IactuallystartedmyPhD
program while still an undergraduate in my senior year at MIT, and then continued
o‰cially in 1973), I was exposed to two wonderful teachers in monetary economics,
Stanley Fischer and Franco Modigliani. Both made me see that monetary policy
played a key role in the health of the macro economy and I was hooked: I knew
that I was going to become a monetary economist. A major intellectual influence on
my thinking was Milton Friedman and Anna Schwartz’s A Monetary History of the
United States, which Stan encouraged his students to read telling us that if we were
serious about being monetary economists, then we had to read Friedman and
Schwartz before going to bed. Being a dutiful student, I took Stan’s advice and was
enthralled by the book. Friedman and Schwartz made it abundantly clear that bad
monetary policies could lead to disaster. In addition, their use of historical episodes
to demonstrate the importance of monetary policy to the economy led me to value
the use of case studies as a research tool, which features prominently in a lot of the
economics discussed in this book.
Giventhisintellectualbackground,myresearch inacademiahasfocusedonissues
that are central to monetary policymaking. However, after I was the director of re-
search and executive vice president of the Federal Reserve Bank of New York from
1994 to 1997, my research took on a more practical bent and I began to write far
moreextensivelyonstrategiesfortheconductofmonetarypolicy.Thisbookisacol-
lectionof my work onthis subject, particularlyover the pastdecade.