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Fed information superiority and its monetary policy objectives

Author: YanWeiShi
Tutor: GanDangShan
School: Fudan University
Course: World economy
Keywords: Fed organization institution information advantage monetary policy target
CLC: F827.12
Type: PhD thesis
Year: 2006
Downloads: 571
Quote: 1
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Abstract

The effects of central bank monetary policy on the economy’s production have always been a key issue in macroeconomic research. However, different schools have different explanations and arguments for this. Most important of all, Keynesian School holds the theory of "the non-neutrality of money", and by assuming the rigidity of price and absorbing the rational expectation thinking modelizes its theory through structural models and then general equilibrium model. The School of Rational Expectation assumes the public’s rational expectation of monetary policy constructs its mathematical models and concludes that the influence of monetary policy on production only depends on the public’s error in their expectation of the monetary policy.By clarifying the theories of monetary policy, the paper proposes that there are limitations about the public’s expectation of monetary policy and the related information cost treatment in the two schools’ theories. In its early stage, the Keynesian School neglected the influence of rational expectation on the outcome of monetary policy; and later they treat the public’s expectation in the same way as the School of Rational Expectation. The School of Rational Expectation however doesn’t recognize the cost in the public’s processing of information. In fact, cost exists, and it should not be neglected. Furthermore, after examining the economic development and the important roles played by the monetary policy of the Federal Reserves in U.S. economy in the last 20 years, it is discovered that the monetary policies of Fed successfully has helped U.S.A. avoid the fluctuations of the inflation and growth in its economy and achieve considerable growth in its GDP. Considering the two above findings, the paper proposes that monetary policies of Fed can not only curb the inflation fairly well but also facilitate the economic growth, and guide the rational expectation formation process of the public.Firstly, the paper describes and discusses the information advantages of the Fed. On the one hand, the structural arrangement of Fed and its relative institution have played a very important role in collecting and utilizing information. The dual structure of the banking system, the Fed structure and the role played by Fed banks in its monetary policy decision making not only facilitate financial innovation and economic development, but also solve the problem of effectively collecting and using economic information for the Fed. On the other hand, Fed’s supervision helps the procurement of relevant economic information, especially the information that cannot be standardized and quantified.Secondary, by constructing a model, the paper analyzes how Fed sets its monetary policy target with its information advantage. It shows that with its information advantage, the Fed’s monetary policy target can effectively curb inflation, help avoid the deflation arising from monetary policies, and thus facilitate the economic growth.Thirdly, by comparing Fed’s monetary policy target with other related theories and examining U.S. monetary policy target through using its economic data of different periods in the history, the paper further proves that Fed’s monetary policy target is effective in curbing inflation, avoiding deflation arising from monetary policy, and facilitating the economic growth.

Fed information superiority and its monetary policy objectives

Abstract

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