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Chapter 26: Q.2 (page 692)

Leo Krippner, an economist at the Reserve Bank of New Zealand, publishes an 'Effective Monetary Stimulus' (EMS) measure, designed to gauge the stance of U.S. monetary policy. Go to the website http://www,rbnz.govt NZ/research-and-publications/research-programme/ additional-research/measures-of-the-stance-of-united states-monetary-policy and examine the EMS measure. Is monetary policy becoming tighter, or looser according to the measure?

Short Answer

Expert verified

The monetary policy began to tighten with the effect of the effective monetary stimulus to the measure as described by Leo Krippner.

Step by step solution

01

Concept introduction.

Effective monetary stimulation is the fiscal stimulus that is designed to stimulate the economy during a recession.

02

Explanation of solution.

According to the effective monetary stimulus, during the lower bound period, the major unconventional monetary events took place which eased up the monetary policy for the period of 2007 to 2012 .

From 2012 onwards the monetary policy began to tighten with the effect of the effective monetary stimulus as described by Leo Krippner.

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Most popular questions from this chapter

"The costs of financing investment are related only to interest rates; therefore, the only way that monetary policy can affect investment spending is through its effects on interest rates." Is this statement true, false, or uncertain? Explain your answer.

Lars Svensson, a former Princeton professor and deputy governor of the Swedish central bank, proclaimed that when an economy is at risk of falling into deflation, central bankers should be "responsibly irresponsible" with monetary expansion policies. What does this mean, and how does it relate to the monetary transmission mechanisms?

During the 2007-2009 recession, the value of common stocks in real terms fell by more than 50%. How might this decline in the stock market have affected aggregate demand and thus contributed to the severity of the recession? Be specific about the mechanisms through which the stock market decline affected the economy.

How can the interest rate channel still function when short term nominal interest rates are at the zero lower bound?

A "rate cycle" is a period of monetary policy during which the federal funds rate moves from its low point toward its high point, or vice versa, in response to business cycle conditions. Go to the St. Louis Federal Reserve FRED database, and find data on the federal funds rate (FEDFUNDS), real business fixed investment (PNFIC96), real residential investment (PRFIC96), and consumer durable expenditures (PCDGCC96). Use the frequency setting to convert the federal funds rate data to "quarterly," and download the data.

a. When did the last rate cycle begin and end? (Note: If a rate cycle is currently in progress, use the current period as the end.) Is this rate cycle a contractionary or an expansionary rate cycle?

b. Calculate the percentage change in business fixed investment, residential (housing) investment, and consumer durable expenditures over this rate cycle.

c. Based on your answers to parts (a) and (b), how effective was the traditional interest rate channel of monetary policy over this rate cycle?
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