Rational Expectation Hypothesis Proposed By Lucas ( 1973 ) And Sargent

Along with moral suasion, persuasion to get consumers to buy, and open market operations, the buying and selling of government securities in financial markets, the easy money policy can only help supply-side economics in it's route to ending a recession and gaining economic stability. All of these policies combined, supply-side, easy money policy, open market operation, and moral persuasion, can all have an impact on important issues. Some of these issues are employment, international trade, and inflation.

It is clear that the economic policy in general and the monetary policy in particular should be concerned with the overall economic well-being. In this paper we propose to discuss this core topic. We will provide an overall picture of the functioning mechanism. In this regard, the discussion will develop around the governmental policies and of FED, and their scope on the free market. The argumentation will refer to the notion of common good and will try to establish if the measures applied by FED have fulfilled their intended purpose given the recent international financial crises of 2007.

One form of direct control can be exercised by adjusting the legal reserve ratio (the proportion of its deposits that a member bank must hold in its reserve account), and as a result, increasing or decreasing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the possible money supply is, in this way, expanded or reduced. This policy tool has not been used too much in recent years. The money supply may also be influenced through manipulation of the discount rate, which is the rate if interest charged by the Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement. The classic method of indirect control is through open-market operations, first widely used in the 1920s and now used daily to make some adjustment to the market. Federal Reserve bank sales or purchases of securities on the open market tend to reduce or increase the size of commercial bank reserves. When the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn. The three instruments of control explained above have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a

Monetary policy uses changes in the quantity of money to alter interest rates, which in turn affect the level of overall spending . “The object of monetary policy is to influence the nation’s economic performance, as measured by inflation”, the employment rate and the gross domestic product, an aggregate measure of economic output. Monetary policy is controlled by

Monetary Policy, in the United States, is the process by which the Federal Reserve controls the money supply to promote economic growth and stability. It is based on the relationship between interest rates of the economy and the total supply of money. The Federal Reserve uses a variety of monetary policy tools to control one or both of these.

A lot of literatures have already studied about the inflation and inflation prediction and in this paper literature review will be discussed from the theoretical aspect and empirical aspect. The researches of the inflation, which are studied, by a lot of scholars in the field of economics have been conducted for a long time especially during the 1970s and it is the heyday when people would like to pay more attention to research the inflation. The inflation has become a hot topic among the economic life and social life since 1987. However, no matter whether it is in the western economic field or in the Chinese economic field, people have different definitions on the inflation and so far there is no unified opinion and conclusion can be accepted generally by everyone. For example, Wyplosz and Burda (1997), Blanchard (2000), and Barro (1997) define that inflation is a sustained rising in the overall price level of products and services in an economy throughout the time period. By contrast, Zha and Zhong (2016) define that inflation is considerable as the mechanism to improve economic growth. In general, the common definition of the inflation is that the inflation is a continuous rising process in the aspect of price. In other words, the value of the currency decreases continually.

Monetary policy, ‘The government’s policy relating to the money supply, bank interest rates, and borrowing’ (Collin: 130), is another tool available to the government to control inflation. Figure 4 shows, that by increasing the interest rate (r), from r1 to r2, the supply of money (ms) is reduced from Q1

Monetary policy affects the aggregate demand by altering the supply or cost of money. One of which is the alteration of the rate of interest. By reducing the interest rate, it encourages consumers and businesses to borrow and spend or invest instead of saving their money. As a result, the supply of money increases. When there is more money, it

The Economy is the backbone to society. There are many factors that operate in, and govern our society’s economical structure. Factors such as scarcity and choice, opportunity cost, marginal analysis, microeconomics, macroeconomics, factors of production, production possibilities, law of increasing opportunity cost, economic systems, circular flow model, money, and economic costs and profits all contribute to what is known as the economy. These properties as well as a few others, work together to influence the economy. Microeconomics and Macroeconomics are two major components. Both of these are broken down into several different components that dictate societal norms and views.

The theory of rational expectations is particularly important for workers ideological of national security , because it is derived from the consequences of the assumption that reaches people in social policy in a rational way , and some of the consequences of its flavor from the ideological principles such as the principle of expediency or Maximin Rawlsian ( see (1 ) for a survey ) . Research has shown that the relevant bargaining in fashion that can be seen as rational from the point of the individual 's point of view , such as the Nash bargaining or Raiffa - Kalai Smorodinsky bargaining , and results in agreements that are fair in some sense. Because of the rigor of this research , much of which depends on the mathematical proof , it is worth careful study of the effects of the ethical .

These conclusions correspond to the claim of the quantitative theory that money is the primary determinant of nominal income. If thus the rate of money circulation does not change (here the rate need not necessarily by a constant ), then money exclusively determines changes in the price level and nominal income, so monetary policy can, through regulating the development of the individual money aggregates (M1, M2, etc.), influence macroeconomic variables and predict their development.

The concept of Invariance Proposition of Rational Expectations, developed by Lucas, Sargent and Wallace in early seventies, presents the idea that the anticipated part of money supply affects price level. Since the present work is devoted to study the relationship between money supply and price level, the Invariance Proposition theory of rational expectation can be applied to examine the relationship between anticipated money supply and price level. In order to apply Invariance Proposition theory in examining the impact of anticipated money supply on price level, we need to estimate the anticipated money supply.

Discretionary monetary policy is the monetary authorities based on the current economic situations and relevant macroeconomic objectives to achieve economic targets through appropriate tools (such as open market operations and the discount rate etc.) to operate expansion or tightening monetary policies(Barro, 1990). This essay will first introduce the optimal discretionary monetary policy and then investigate the role of supply shock in that policy. Afterwards, analyze the implication of the supply shock in discretionary model and how it helps the European Central Bank’s (ECB’s) responds to 2007-2008 financial crisis. And finally conclude the relationship between the implication of discretionary theory with shock and the real responds to

Inflation forecasting plays a central role in monetary policy formulation. Recent international empirical evidence suggests that with the decline in inflation of recent years, a fairly widespread phenomenon, the combined dynamics of this variable and its potential predictors, such as money or different measures of the output gap, has changed, and inflation has become more unpredictable. Univariate models tend to show a better forecasting capacity than those based on various inflation theories, such as the Phillips curve. Traditionally, in industrialized countries the Phillips curve has played a predominant role in inflation forecasting, and according to Stock and Watson (1999), Atkenson and Ohanian (2001) and Canova, (2002), it would seem to perform better in terms of forecasting error than other alternative models. In recent years there have

Finally, the impact of anticipated money supply on price level is also analyzed by using