Macroeconomics Theories and Policies
Quiz 18 :
Optimal Monetary Policy
The Federal Reserve is not completely independent for a number of reasons,most importantly that it was created by an act of congress and can be disbanded by an act of congress.Also,the chair is up for reappointment every four years.Finally,the chair has to appear regularly before congress to answer questions.
Monetary policy is less effective.Targeting interest rates makes the LM curve flatter,meaning that changes in the IS curve have a larger effect on income.Thus,the costs of not offsetting changes in the IS curve by targeting interest rates become larger.
More independent central banks are more isolated from political pressure,are better able to establish a reputation to avoid problems with time inconsistency,and are more likely to be run by qualified professionals.Research indicates that countries with more independent central banks have lower inflation without lower output.