TAILIEUCHUNG - Lecture Principles of money, banking, and financial markets (12th edition): Chapter 28 - Ritter, Silber, Udell

Chapter 28 - Empirical evidence on the effectiveness of monetary policy. In this chapter you will learn to understand the historical volatility in velocity and money demand and the implications of that volatility for Keynesianism and monetarism, explain the fiscal and monetary policy lags and the resulting difficulties in enacting these policies. | Chapter 28 Empirical Evidence of the Effectiveness of Monetary Policy Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Learning Objectives • Understand the historical volatility in velocity and money demand and the implications of that volatility for Keynesianism and monetarism • Explain the fiscal and monetary policy lags and resulting difficulties in enacting these policies • Analyze the empirical evidence relating monetary and fiscal policies to GDP, investment, consumption, and interest rates Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 28-2 Introduction • Previous chapters dealt with theoretical concepts of monetary theory on economic activity • This chapter explores empirical evidence – How are interest rates affected – What categories of spending are most influenced – Does monetary policy alter real economic outcomes—output and unemployment—as compared to changes in prices Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 28-3 1 Living with Velocity • Much of Monetarist-Keynesian debate hinges on the behavior of velocity – Monetarists—relatively stable and changes are highly predictable – Keynesians—neither contention is true, velocity can vary unpredictably • While velocity is not constant, changes do not appear to be obviously random or perverse Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 28-4 Living with Velocity (Cont.) • If the Federal Reserve could discover the underlying determinants of these changes, it might still be able to coexist with such a moving target • Figure plots the historical movements of measures of velocity for two definitions of the money supply—M1 and M2—over time – Velocity of M2 has been relatively stable Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 28-5 FIGURE Historical movements in M1 and M2 velocities. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 28-6 2 Living with Velocity (Cont.) • Figure (Cont.) –

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