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4 - Central bank autonomy and exchange rate regimes – their effects on monetary accommodation and activism

from I - Monetary institutions and policy

Published online by Cambridge University Press:  05 September 2013

Sylvester C. W. Eijffinger
Affiliation:
Katholieke Universiteit Brabant, The Netherlands
Harry P. Huizinga
Affiliation:
Katholieke Universiteit Brabant, The Netherlands
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Summary

Introduction

Policy makers usually adjust the money supply in response to various developments in order to achieve several objectives such as a high level of economic activity, maintenance of the real exchange rate within a desired range, and price stability. The relative importance assigned to alternative objectives is one of the factors affecting the magnitude and the direction of the response of the money supply to various economic developments. For example, if policy makers are mostly concerned with economic activity and employment, they are likely to, at least partially, accommodate recent wage increases. By contrast, if they are concerned mostly with price stability they are likely to “lean against the wind” by reducing money supply growth in response to accelerations in wage inflation. If they are concerned mostly with international competitiveness and the level of the real exchange rate they are likely to loosen the money supply in response to increases in foreign prices. However, if they are concerned mostly with price stability they may actually reduce money growth in response to increases in foreign inflation.

Countries with central banks that have a clear mandate to focus on price stability, and which are relatively independent from political authorities, are therefore more likely to lean against both domestic and foreign inflationary impulses by making money growth independent of those impulses – or even by reducing money growth in response to increases in domestic wage inflation or foreign price inflation.

Type
Chapter
Information
Positive Political Economy
Theory and Evidence
, pp. 78 - 110
Publisher: Cambridge University Press
Print publication year: 1998

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