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Chapter 17: Q.14 (page 468)

Why might macroprudential regulation be more effective in managing asset-price bubbles than monetary policy ?

Short Answer

Expert verified

Macroprudential regulation incorporates a policy to impact just the thing that is happening in credit showcases and is along these lines the right device for getting control over credit-driven asset-price bubbles.

Step by step solution

01

Concept Introduction

Regardless of whether an asset price bubble is going on, as asset prices increment and lift the viewpoint for financial movement and expansion, the money-related policy ought to respond by moving to a more prohibitive position. After an air pocket explodes and the standpoint for financial action degenerates, the policy ought to turn out to be more useful.

02

Explanation

As a complement to macroprudential tools, macroprudential regulation should be concerned with providing the stability of the financial system as a whole and the relief of risks to the real economy.

Macroprudential regulation directs to decisions that make the motivator framework for individual firms sound and reliable, so externalities - impacts of one's choices on others - are incorporated.

03

Step 3; Final Answer

Macroprudential regulation incorporates a policy to impact just the thing is happening in credit advertises and is consequently the right apparatus for getting control over credit-driven asset-price bubbles

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Most popular questions from this chapter

7. How does inflation targeting help reduce the time inconsistency problem of discretionary policy?

“If the demand for reserves did not fluctuate, the Fed could pursue both a reserves target and an interest-rate target at the same time.” Is this statement true, false, or uncertain? Explain

1. What are the benefits of using a nominal anchor for the conduct of monetary policy?

Why might it be better to lean against credit-driven bubbles rather than just clean up after asset bubbles burst?

. Since monetary policy changes made through the fed funds rate occur with a lag, policymakers are usually more concerned with adjusting policy according to changes in the forecasted or expected inflation rate, rather than the current inflation rate. In light of this, suppose that monetary policymakers employ the Taylor rule to set the fed funds rate, where the inflation gap is defined as the difference between expected inflation and the target inflation rate. Assume that the weights on both the inflation and output gaps are ½, the equilibrium real fed funds rate is 4%, the inflation rate target is 3%, and the output gap is 2%. a. If the expected inflation rate is 7%, then at what target should the fed funds rate be set according to the Taylor rule?

b. Suppose half of Fed economists forecast inflation to be 6%, and half of Fed economists forecast inflation to be 8%. If the Fed uses the average of these two forecasts as its measure of expected inflation, then at what target should the fed funds rate be set according to the Taylor rule?

c. Now suppose half of Fed economists forecast inflation to be 0%, and half forecast inflation to be 14%. If the Fed uses the average of these two forecasts as its measure of expected inflation, then at what target should the fed funds rate be set according to the Taylor rule?

d. Given your answers to parts (a)–(c) above, do you think it is a good idea for monetary policymakers to use a strict interpretation of the Taylor rule as a basis for setting policy? Why or why not?
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