External openness makes the effectiveness of monetary policy complex

‭ xternal openness makes the effectiveness of monetary policy complex‬ E ‭See ISLIP‬ -‭ ‬‭So high mobility of K in fixed exchange‬‭: LM movement‬‭to the right. Nv balance with BP<0, BC‬ ‭must increase Ti to Maintain parity - LM returns -‬‭completely‬‭ineffective‬‭.‬ ‭-‬‭If low mobility of K and fixed change‬‭: LM to the‬‭right - BP<0 - decrease in national currency‬ ‭value - BC must increase Ti to restore parity -‬‭Completely‬‭ineffective.‬ ‭-‬‭So high mobility of K and floating change‬‭: LM movement‬‭to the right. BP<0 - currency‬ ‭depreciation - + X and less M - IS movement to the right -‬‭Very effective‬‭.‬ ‭-‬‭If low mobility of K and floating exchange‬‭: LM movement‬‭to the right. BP<0 - currency‬ ‭depreciation - + X and less M - IS movement to the right and BP moves to the right because‬ ‭depreciation - nv balance which has‬ ‭- - increase Y -‬‭Very effective‬‭.‬ ‭Should the FED be interested in‬ ‭asset prices?‬‭So asset prices under‬ ‭the Taylor rule?‬ ‭-No. There must be an indicator per objective, otherwise it is not efficient. MIP and MAP take‬ ‭care of the assets, not MOP. Changing the Taylor rule was a proposal from Aglieta in 2012‬ ‭because there was no MAP.‬ ‭ )‬‭The impact of expectations on economic policies:‬ 3 ‭1-‬‭Rigor policy and adaptive anticipation:‬ ‭a)‬‭The sacrifice ratio:‬ ‭Disinflation path:‬ ‭ odel which assumes sacrifice‬‭ratio‬‭.‭W M ‬ e have temporary‬‭unemployment‬‭, but we return to‬ ‭equilibrium unemployment.‬ ‭Explanation:‬‭We have a division by 2 of the - of the‬‭money supply (M), but the inflation is not‬ ‭divided by 2. Pk?‬ ‭-Because agents prisoners of the past - think that inflation will not decrease - continue to increase‬ ‭prices while there is no increase in M - negative effect on - - unemployment higher than necessary‬ ‭for disinflation.‬ ‭ hen anchoring of expectations - drop in inflation. To return to initial unemployment, temporary‬ T ‭increase in M for real cash flow effect (otherwise desinflat° continues). Then, rule policy (‬‭dM = dP‬ ‭+ - potential‬‭).‬ ‭ xample of Volcker's policy:‬ E ‭1979: -M = 17%, infla = 14%, unemployment = 6%, -GDP = 3%‬ ‭1980: -M = 10%, infla = 12%, unemployment =‬ ‭8%, -GDP = -2% Then, ca continues as shown in‬ ‭the graph.‬ ‭1984: -M=7%, inflation =4%, unemployment =8%, -GDP=8%.‬ ‭-1985: we make a temporary increase in M of 12% to stimulate - -‬ ‭unemployment returns to 6% The following years: inflation 4%,‬ ‭ nemployment 6%, -GDP 3% and -M=7%.‬ u ‭-Success.‬ ‭ )‬‭political arbitration:‬ b ‭The question is whether we should have rapid or gradual disinflation.‬ ‭-Rapid disinflation is generally associated with a lower ratio.‬ ‭-The ratio is even lower as L's contracts are short.‬ ‭-If progressive disinflation - debt bp (at the economic trough)‬ ‭-If rapid disinflation - suffering.‬ ‭c)‬ ‭The importance of not stopping a reflation policy too early:‬ ‭ ecause otherwise expectations of inflation are not anchored enough and we return to‬ B ‭defla/recession.‬ ‭Ex: 30s - refla policy (we favor Cartel etc.). After 4 years of deflation we reflated (1933) but‬ ‭not enough (until 1937) - anticipations not anchored enough. Return to recession: Between‬ ‭1937 and 1938: Y industrial dim by 30%‬ ‭ -‬‭Economic policy and rational expectations:‬ 2 ‭a)‬ ‭PM: credibility = central asset of the BC:‬ ‭AR helps avoid sacrifice ratio. So it's cool. - But I need a credible BC.‬ ‭Explanation: If agents believe in the BC's commitment to stabilizing inflation at a low level -‬ ‭anticipate - no more need for sacrifice - in this case, the PM is also neutral to CT.‬ ‭ )‬‭PB: for successful budgetary consolidation in exceptional cases.‬ b ‭-How to eliminate Ricardian behavior? We‬ ‭must be credible in consolidation.‬ ‭ ow to be credible - an example:‬ H ‭California:‬‭A.Schwarzenegger‬‭governor from 2003 to 2011‬‭- widens ++ the deficit. Californians‬ ‭saved a lot because of the Ricardian effect.‬ ‭Arrived from‬‭J.Brown‬‭-broke that by making himself credible.‬‭For this - brilliant action - budget‬ ‭reduction by 10% and civil servant salary reduction by 10% without reducing taxes.‬ -‭ Success: increase C and decrease S.‬ ‭-In PB the question does not arise whether we do it progressively or all at once - we have to do it all‬ ‭at once.‬ ‭ -‬ 3 ‭Assessment:‬ ‭+ the BC is credible, + the agents trust, and + the path to recovery is‬ ‭smooth. And the sacrifice ratio is increased by the rigidity‬ ‭In 1979 (Volcker) is not credible + price rigidity - strong path (AA)‬ ‭Disinflation policy France 90s, BDF has average credibility (because recent) -‬ ‭average path BCE 2020 has total credibility but still a small path, because AR but‬ ‭price and salary rigidity. In fact, the hypothesis of AR with flexible prices and wages‬ ‭(therefore no path) is impossible.‬ ‭There is also a question of social justice: it is mainly the LNQ who are affected (LNQ‬ ‭unemployment increased by 2* + after 1979 than LQ unemployment in the US).‬ ‭-‬‭Communication policy has‬‭established itself as a‬‭key instrument of the PM. Communication‬ ‭from the BC on the expected future evolution of Ti to CT becomes the very essence of the PM.‬ ‭ )‬ 4 ‭Other instruments of economic policy:‬‭1-‬ ‭Exchange rate policy - see finance and Europe‬ ‭courses:‬ ‭ )‬ a ‭The choice of exchange rate regime:‬ ‭For flexibility, a floating exchange rate system only has advantages:‬ ‭Friedman‬‭, In "‬‭Defense of flexible exchange rates‬‭»‬‭1953‬‭highlights‬‭the advantages of the‬ ‭floating exchange rate system:‬ ‭-Allows automatic rebalancing of current balances: if a country has a deficit, its currency‬ ‭depreciates (decrease in the D of the country's currency) - consecutive improvement in its price‬ c‭ ompetitiveness allows increase X - BC rebalancing.‬ ‭Conversely in the event of surpluses. -‬‭No lasting‬‭imbalance in floating exchange rates.‬