Page 10 - FINAL CFA SLIDES DECEMBER 2018 DAY 6
P. 10
Session Unit 5:
18. Monetary and Fiscal Policy
LOS 18.l: Contrast the use of inflation, interest rate, and exchange rate targeting by central banks, p.116
Inflation targeting, versus interest rate targeting versus exchange rate targeting!
LOS 18.m: Determine whether a monetary policy is expansionary or contractionary, p.117
Policy rate higher = Contractionary MP
Policy rate lower = Expansionary MP
LOS 18.n: Describe limitations of monetary policy., p.118
Increasing M could instead increase inflation expectations and increase long term rates (due to IP) –
bond market vigilantes!
Liquidity trap - Individuals may be already willing to hold greater cash balances such even short-term
rates increases is not contractionary;
Banks unwilling to lend greater amounts, even with increased excess reserves.
Short-term rates cannot be reduced below zero.
Developing economies -undeveloped financial markets/lack of credibility of the monetary authorities.
