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Macro Written Assignment Essay Example

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Macro Written Assignment

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The Bank of England outlined its stratagems for alterations in rates of interest in the future. This could probably mean more suffering for the saving population but there would continue to be inexpensive mortgage rates. The Bank would only consider increasing the current low interest rate levels if either inflation or unemployment or both was no longer manageable. The stratagem or change in monetary policy known as the forward guidance would affect the main indicators in macroeconomics such as income, price level as well as interest rates.The new Keynesian Model helps explain the impact of the forward guidance policy on various macroeconomic issues. The beauty of this framework is that it provides a summary of the progression of the economy as an end product of the equilibrium between supply and demand (Palley, 1996). The latter is epitomized by the supposition that growth in spending is highly dependent on interest rates. When rates of interest are low, individuals tend to opt for a path along which spending has gradual growth. However, when the rates are high, future goods appear to be cheap in comparison to present goods. For this reason, people transfer expenditure in the future and hence the growth in spending is likely to grow faster between now and in the future (Carlstrom et al.Supply is epitomized in the form of the celebrated Phillips curve that links inflation, expected future inflation as well as demand in relation to supply in the commodity market. The MPC is said to set rates of interest in relation to the rate of inflation combined with output deviation from its long run path. With the input of this model in the simulation of the impact of forward guidance, one finds that the policy has a grand effect on inflation along with productivity (Lucas, n.One way of scrutinizing the impact of the policy change in rates of interest or other related variables is by observing their movements in the instantaneous end result of the announcement of the policy. If this policy directly stimulates production, if the new Keynesian model is to be assumed, then it should also bring about improved levels of anticipated future inflation. In the context of the country in question, that is, the United Kingdom, with levels of inflation above the target for a half a decade, the Monetary Policy Committee was careful in the implementation of this policy so that it did not incur stakes

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References

Campbell, J. R., Evans, C .L. Fisher, J.D. & Justiniano, (2012). A. Macroeconomic Effects of Federal Reserve: Forward Guidance. Brookings Papers on Economic Activity. 44, 1-80.

Carlstrom, C, Fuerst, T & Paustian, M. (2012.) Inflation And Output Multipliers In New Keynesian Models with a Transient Interest Rate Peg. Bank of England Working Paper 459.

Del Negro, M., Giannoni, M. & Patterson, C. (May 2013). The Forward Guidance Puzzle. Staff Report No 574.

Gali, J. (N.D.) Monetary Policy, Inflation And The Business Cycle: An Introduction To The New Keynesian Framework. Princeton University Press.

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Jossa, B., & Musella, M. (1998). Inflation, Unemployment, And Money: Interpretations Of the Phillips curve. Cheltenham, UK, E. Elgar.

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Levin, A. T. (2009). Limitations On The Effectiveness Of Forward Guidance At The Zero Lower bound. London, Centre for Economic Policy Research.

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Lucas, R.E. (N.D.) Supply-Side Economics: An Analytical Review. Oxford Economic Papers. Vol. 42. Pp. 293-316.

Monetary Policy Committee. (2013a). Monetary Policy Trade-Offs And Forward Guidance. Bank of England.

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Palley, T. I. (1996). Post Keynesian Economics: Debt, Distribution, And The Macro Economy. Hound mills, Basingstoke, Hampshire, and Macmillan Press.

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Weale, M.R. (2013) Monetary Policy And Forward Guidance. Speech Delivered At Quintin Kynaston Academy. 15th November.

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