Monetary and fiscal policy
1. Introduction
2. Monetary Policy
Creating money
Process of money creation
definitions of money
Quantity theory of money
The demand for and supply of money
The Fisher Effect
The Role of Central banks
Monetary policy tools
Policies of the Central bank
Effectiveness of a Central bank
Types of policies
Relationships
Limitations of monetary policy3. Fiscal policy
Budget surplus/debt
Issue: Concern about national debt?
Fiscal policy tools
The fiscal multiplier
Effectiveness of fiscal policy
Monetary and fiscal policy
Conclusions and Summary

Policies of the Central bank
Inflation targeting
Central banks are often involved in price-level stability.
Unexpected inflation is costly because it is not factored into wage negotiations and contracts, and the uncertainty regarding inflation can affect (and exacerbate) the business cycle.
Inflation targeting is the maintenance of price stability using monetary policy.
Common target: 2% based on the CPI
In developing nations, there are challenges to price stability (e.g., illiquid government bond market, changing economy, changing definition of money supply, and lack of credibility).
Exchange rate targeting is used by some countries.
Exchange rate targeting requires setting a band for the target exchange rate against a major currency.
The central bank buys and sells foreign currency toward the goal.
Risk: Speculators may trade against the monetary authority.