econnomices exercises

Monetary Policy (EC470) Homework 4

Giorgi Nikolaishvili

August 9, 2021

Exercise 3 (Monetary Institutions and Strate-

gies)

Part (a)

Governors of the Federal Reserve serve overlapping terms in office. When one governor is appointed, the others are at various points in their terms. Suppose a new law mandates that all governors be appointed at the same time for concurrent terms. Would this increase or decrease the risks of discretionary monetary policy? Explain.

Part (b)

Consider the relationship between inflation and Taylor rules. (i) The adjust- ment of interest rates under inflation targeting is similar to a Taylor rule. Explain why. (ii) If a central bank shifts from flexible inflation targeting to strict targeting, does the equivalent Taylor rule become more or less ag- gressive? (A more aggressive rule responds more strongly to movements in output and inflation.)

1