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Early proposals of monetary systems targeting the price level or the inflation rate, rather than the exchange rate, followed the general crisis of the gold standard after World War I. Irving Fisher proposed a "compensated dollar" system in which the gold content in paper money would vary with the price of goods in terms of gold, so that the price level in terms of paper money would stay fixed.
The Impossible Trinity or "The Trilemma", in which two policy positions are possible. If a nation were to adopt position a, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.
The monetary policy of the United States is the set of policies which the Federal Reserve follows to achieve its twin objectives of high employment and stable inflation. [1] The US central bank, The Federal Reserve System, colloquially known as "The Fed", was created in 1913 by the Federal Reserve Act as the monetary authority of the United States.
Instruments of monetary policy have included short-term interest rates and bank reserves through the monetary base. [1]With the creation of the Bank of England in 1694, which acquired the responsibility to print notes and back them with gold, the idea of monetary policy as independent of executive action began to be established. [2]
Friedman asserted that actively trying to stabilize demand through monetary policy changes can have negative unintended consequences. [5]: 511–512 In part he based this view on the historical analysis of monetary policy, A Monetary History of the United States, 1867–1960, which he coauthored with Anna Schwartz in 1963. The book attributed ...
Monetary policy is the outcome of a complex interaction between monetary institutions, central banker preferences and policy rules, and hence human decision-making plays an important role. [100] It is more and more recognized that the standard rational approach does not provide an optimal foundation for monetary policy actions.
The Chairman was also required to appear before Congress at semi-annual hearings to report on the conduct of monetary policy, on economic development, and on the prospects for the future. The Federal Reserve Act has been amended by some 200 subsequent laws of Congress. It continues to be one of the principal banking laws of the United States.
The LM curve may shift because of a change in monetary policy or possibly a change in inflation expectations, whereas the IS curve as in the traditional model may shift either because of a change in fiscal policy affecting government consumption or taxation, or because of shocks affecting private consumption or investment (or, in the open ...