How do you decipher a monetary policy, and make intelligent observations about it?



Answer:
Monetary policy is designed with two goals. The first and the most important goal is to keep inflation low and predictable. The second goal, which is often considered to be less important these days, is to offset adverse shocks that affect unemployment and production.

The art of monetary policy has evolved tremendously in the last 30 years. In the "old days", central banks used monetary aggregates (M1, M2, etc.) as their targets. Today, most central banks use interest rate rules, which relate short-term interest rates to expectations about future inflation and unemployment.

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