Monetary policy analysis: An undergraduate toolkit

Abstract

The nuts and bolts of setting monetary policy are often hard to get across to students. There are a number of key hurdles to overcome. First, the conceptual idea of how setting interest rates may (or may not) act to stabilize an economy comprising many households, firms, financial institutions and a significant government sector. Secondly, there are a host of institutional details to convey such as the framework for monetary policy, the relationship between the Finance Ministry and the central bank and what might be the ultimate objectives of stabilization policy. Thirdly, the theory of monetary policy is itself really developing into a branch of ‘robust’ control theory and so is subject to severe technical barriers at the frontier.3 And finally, there is the aspect of the real data: how do we convey the idea that the observed economy is not some clearly identifiable mass but a construct based upon a myriad of observations or surveys announced on a daily basis? The mixture of institutional detail, high theory, data and, at times, low politics makes monetary policy courses a daunting mix for instructor and student alike.