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Full Description
This is the first comprehensive presentation of how monetary policymakers can use market prices to produce price stability. Drs. Johnson and Keleher show why other, conventional methods have failed and why market prices are superior guides for setting monetary policy. Their book presents the rationale, history, and philosophy underlying their approach; offers three forms of empirical research evidence to support it; and then presents special methods to use market prices as policy setting guides. Important and challenging reading for monetary policymakers and economists, bankers, financial analysts, and professional investors, as well as their colleagues in the academic community with similar interests.
Substantial changes involving revolutions in telecommunications and information processing, financial deregulation, and the global integration of financial markets have altered the environment in which central banks operate. This altered environment has undermined various conventional approaches to monetary policy. This book presents an alternative market price approach to monetary policy. The approach is easily adapted to the above-cited change: it adopts a price stabilization policy goal and uses key market prices from the commodity, foreign exchange, and bond markets as guides to policy. Commodity prices, foreign exchange rates, and bond yields represent proxies for the exchange rate between domestic money and (1) commodities, (2) foreign monies, and (3) future money (bonds), respectively. These market prices are assessed in conjunction with one another to yield policy guidance to the monetary authority. This book describes how this approach is carried out in practice. Empirical evidence support the approach from three perspectives. First, empirical support exists for each of the individual market price indicators examined in isolation. Second, market price indicators provided accurate signals for monetary policymakers during the post-Bretton Wood era. Had this market price approach been used by policymakers, the performance of the macroeconomy during this period likely would have been improved. Third, at least one historical episode demonstrates that when the approach was employed, economic performance was impressive, and price stability was, in fact, achieved.
Contents
Introduction
The Changing Financial Environment
Problems with Alternative Approaches to Policy
An Outline of the Market Price Approach to Monetary Policy
Historical Foundations of the Market Price Approach
The Methodological Rationale for Using Price Data
The Workings of Monetary Policy: Lessons and the Appropriate Policy Instrument
The Yield Spread and Bond Yields: Evidence of Their Use as Monetary Policy Indicators
Commodity Prices: Rationale and Empirical Evidence as a Monetary Policy Indicator
The Foreign Exchange Rate: Rationale and Evidence as a Monetary Policy Indicator
The Use of Market Prices in Conjunction with One Another
Market Price Indicators and Monetary Policy from 1970 to 1990
The Market Price Approach to 1930s Monetary Policy in Sweden
Summary and Conclusions
Index