The effectiveness of the central bank

Heng Yue Chu

【abstract】Monetary policy is an important part of economic stabilization policy and a tool that uses monetary control policies to influence macroeconomic variables and outcomes. The global financial crisis challenged the existing monetary policy. Before the crisis， dangerous financial imbalances grew under stable output gaps and low inflation. After the bust， a massive stimulus mitigated the downturn， but could not prevent the deepest recession since the Great Depression，so policymakers have to use monetary policy to relieve these fluctuations that created by these frequent shocks.

【key words】The effectiveness ； the central bank's ；monetary policy

Barro and Gordon used the repeated game model to explain the microeconomic monetary policy effect， constructed the monetary policy reputation model. Barro and Gorden introduced a discussion of government preferences for government multiple objectives， assuming that the central bank can be divided into two types， one choice of cooperation strategy， is a tough policy enforcer， relative to the unemployment rate is more concerned about inflation， can not stand too high inflation； the other is just the opposite， more concerned about the output and unemployment rate， is a moderate policy enforcer， can endure some inflation. In this case only consider the public and the central bank between the repeated games， assuming that the central bank's term is limited.

First， at the beginning of the game， Nature randomly chooses a specific type of central bank， which announces an optimal monetary policy for existing economic conditions and sets policy objectives.

Then， during the period of the central bank's term of office， no matter what type of central bank would choose zero inflation in order to establish a reputation. As the central bank keeps its promises longer and longer， the public will continue to raise expectations of the central bank， while also reducing expectations of future inflation， which makes the central bank to generate unexpected gains from inflation getting bigger. At this stage， the moderate central bank can randomly choose its own strategy.

In the case of the game itself， for a tough central bank， no matter how the public is expected to change， it will choose zero inflation， which is similar to the monetary policy to a fixed rate of inflation as the target system， in order to achieve a certain Specific inflation levels irrespective of the volatility of output， which makes the role of monetary policy stable economy is greatly limited. But the moderate central bank is different， at different stages will take a different strategy： at the beginning of the game， the moderate central bank in order to establish a strict compliance with the commitment of the reputation， will choose zero inflation rate， so the public is expected to zero. Over time， a moderate central bank can choose a cooperative strategy， or choose an uncooperative strategy， depending on the size of the long-term expected earnings and the short-term opportunistic loss.

This can summarize the basic conclusion of the model： under the condition of incomplete information， the central bank has obvious information superiority， the public can not accurately determine the type of central bank， but because no matter what type of central bank， the more inflation Low， then the policy goal in any case easier to achieve， if the central bank has a bad reputation， the public inflation is expected to high， then the policy objectives is difficult to achieve， so that the political support will be reduced ， This is the government most reluctant to see the results. So the tendency to pursue a reputation makes different types of central banks always implement a tougher monetary policy.

In this model， the conclusion is that when the economic actors on the implementation of the relevant economic policies and the actual operation of the economy there is incomplete information， the public will be more dependent on the reputation of the government policy to judge， the higher the reputation， that is， the government The more credible the inflation target is， the public expectation of inflation is also declining， which makes the central bank's monetary policy more and more effective. From the perspective of the strategy choice of the behavioral subject of the game theory， it is possible to stabilize the public's expectation of monetary policy only by improving the transparency of the central government's monetary policy， so that the public's expectation of monetary policy is consistent and may achieve the goal of policy， And ultimately guarantee the effectiveness of the implementation of monetary policy.

All in all， central bank has right to determine nominal interest rate and inflation target via using the monetary policy directly， and also has the ability to affect the state of expectations， and then though monetary interventions to achieve their predetermined goals with more effectiveness， and they cant ignore to strength their reputation and implement credible monetary policies to estimate the problem of time inconsistency. Stable inflation rate， low output gap and unemployment rate form a stable and effective monetary policy can make to a productive and suitable economy environment for people and firms， it also encourages consumption and long-term investment， and then contributes to sustained job creation and economy development.

【Reference】

[1]R. J. Barro &D. B. Gordon. A positive theory of Monetary Policy in a Natural Rate Model. http：//www.web2.uconn.edu/ahking/BarroGordon83.pdf

[2]Bank of Canada. Monetary policy. http：//www.bankofcanada.ca/core-functions/monetary-policy.