Home > Uncategorized > On NAIRU and NAIBER

On NAIRU and NAIBER

from Maria Alejandra Madi

Throughout the last decades, the nominal interest rate became the dominant monetary policy instrument. Looking backward, the early 1980s proved to be a transition period in terms of monetary policy. After the monetarist experiences of Thatcher and Reagan, there was a pragmatic shift from the supply of the monetary base to the interest rate as monetary policy instrument. The recognition that the control of the monetary base could not only impose extreme volatility to the interest rate but also deeply affect the whole economy challenged, in fact, the previously stable empirical relationship between money supply, demand for money, prices, and income supported by Milton Friedman.

At the theoretical level, the so-called “New Consensus in Macroeconomics” favoured the short-term interest rate as the policy instrument in conjunction with inflation targeting. The new-Keynesian so-called “Taylor rule” has increasingly turned out to be adopted by central banks to manage the interest rate as the policy instrument. In this policy approach, the central bank, mainly through open market operations, sets the short-term interest rate in order to adjust its level in response to changes in inflation and output. In a framework of capital account openness, however, the autonomy of monetary policy, aimed to stabilize prices, subordinates the fiscal budget.

After the global financial crisis, academic economists and policy makers have actively participated in the debate on monetary policy.  read more . . .

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