Edited by William F. Shughart II, Laura Razzolini and Michael Reksulak
Chapter 15: Monetary policy
Monetary policy involves actions taken by central banks to affect the level of interest rates and the amounts of money and credit available in an economy. These actions are intended to promote national economic goals such as price stability and sustainable economic growth. Many central banks now operate with a considerable degree of policymaking independence, and many also have inflation targeting mandates. These monetary authorities must nevertheless be mindful of the political context in which they make their policy decisions. This chapter covers important aspects of the political environment that central banks often confront when formulating monetary policy, and addresses both how and why central banks occasionally respond to political pressures. Moreover, monetary policy decisions are often made by committees that hold regular meetings in which members vote on a one-dimensional issue (the degree of ease or tightness of monetary policy). The availability of data on the decisions of monetary policy committees and the preferences of the committee’s individual members provide excellent opportunities to study partisan loyalties and partisan ideologies at the level of individual committee members and the mechanisms by which these committees aggregate preferences to reach a policy decision. Because the analysis of committee decision-making is of independent interest in the field of public choice, this chapter concludes with a discussion of this intriguing branch of research on monetary policy.
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