Monetary Policy

If one would take literally most economic textbooks on macroeconomics, or money-credit-and-banking, monetary policy consists of a central bank taking control of the money supply of the country and thus in the basic textbook macro-economic model shifting the LM or AD curve. This simple textbook representation can cause, and in the history of monetary economics has caused, a lot of confusion and mistakes. In the real world, the implementation of monetary policy (demand and supply in the market for bank reserves) and the macroeconomics of monetary policy (transmission channels and strategic objectives) are more complicated and require much more careful study.

This webpage provides information about monetary policy in developed countries.

First, two introductory pages describe the general framework of monetary policy. This framework consists of, first, a brief description of monetary policy strategy, objectives and transmission channels, and, second, a description of monetary policy tactics, operating procedures, reactions functions and rules.

In economic theory and economic research, some key notions with respect to monetary policy and understanding its effects are:

1* incorrectly identifying monetary policy shocks (i.e. unexpected changes to supply conditions in the 'money' market) creates distortions in empirical studies (i.e. confusing demand and supply effects);

2* incorrectly identifying monetary policy reaction functions (i.e. the systematic response to economic circumstances) distorts empirical results (i.e. not correctly separating cause and effect);

3* indicators of monetary policy (i.e. policy interest rates) are not necessarily also the primary transmission channels of monetary policy (i.e. perhaps credit channels, expectations, etc.)


Next, for each of 4 major central banks there is a page with a description of organizational structure and decisionmaking bodies, interest rate policy ('tactics'), intermediate targeting ('strategy') and references to literature. These 4 countries are:

    • Euro area (European Central Bank, ECB),
    • United States (Federal Reserve System, Fed),
    • United Kingdom (Bank of England, BoE),
    • Japan (Bank of Japan, BoJ),

In addition, I provide some details on two countries that are now part of the Euro area:

    • Germany (Deutsche Bundesbank, DBB until 1 January 1999)
    • Netherlands (De Nederlandsche Bank, DNB until 1 January 1999)

SELECTED BOOKS AND ARTICLES

This following list contains selected books and articles describing monetary policy in a more general nature and/or with a perspective on multiple countries. Some entries focus on more specialized topics such as causality tests and identification issues, central bank independence and flexibility and accountability, selecting intermediate targeting strategies, etc. Books and articles are presented in chronological order.

REFERENCES AND INTERNET LINKS