2. When u is high, the economy has not only idle workers but also idle resources, resulting in a lower GDP. But how low should u be? Because frictional unemployment (which involves searches by workers and firms to find suitable matchups) is desirable, and because policy can do little about structural unemployment (due to a mismatch between job requirements and the skills of workers), the goal of high employment should seek not u = 0 but u > 0 consistent with full employment (at which the demand for labor equals the supply of labor). This level of u is called the natural rate of unemployment.
Chapter 18
Conduct of Monetary Policy: Goals and Targets
© 2005 Pearson Education Canada Inc.
Hale Waihona Puke Goals of Monetary Policy
Goals
1. High Employment 2. Economic Growth 3. Price Stability 4. Interest Rate Stability 5. Financial Market Stability 6. Foreign Exchange Market Stability Goals often in conflict
© 2005 Pearson Education Canada Inc.
18-2
High Employment
High employment is a worthy goal for two reasons:
1. The alternative situation, high unemployment, causes much human misery, with people suffering financial distress, loss of personal self-respect, and in crime.
© 2005 Pearson Education Canada Inc. 18-4
Price Stability
In recent years policymakers have become increasingly aware of the social and economic costs of inflation and more concerned with a stable P as a goal of economic policy. In fact, P stability is viewed as the most important goal for monetary policy because inflation creates uncertainty that may hamper growth inflation makes it hard to plan for the future inflation may strain a country’s social fabric (by creating conflicts between different groups) extreme inflation, known as hyperinflation, leads to slower growth as for example in Argentina, Brazil, and Russia in the recent past.
© 2005 Pearson Education Canada Inc. 18-3
Economic Growth
The goal of steady economic growth is closely related to the goal of low u because businesses are more likely to invest in physical capital to productivity and growth when u is low. If u is high and factories are idle, it does not pay for firms to invest in additional physical capital. Hence, policies can be specifically aimed at promoting economic growth by directly encouraging firms to invest or by encouraging people to save, which provides more funds for firms to invest. In fact, this is the stated purpose of so-called supply-side economic policies, which provide tax incentives for firms to invest more and for people to save more.