Question

According to the article, "The Science and (Art), of Monetary Policy," there are three principles that "form the core of the 'scientific' approach to monetary policy. Explain (do not jus list) in your own words the three principles. Secondly, even with these three principles to guide monetary policy, in what way is monetary policy an art ?

Answer 1

Answer

Principle 1 -The principle 1 say Focus on the output gap that means the optimat solution is to have the central bank to adopt a realistic output objective and it should strive to stablize the output near the potential output which is also called full employemnt output.

Principle 2 - It say thst to Follow thje Taylor principle- This is the second principle in the scientific approach to the policy (moentry ) which states that the central bank policy regarding interest rate should be increased more than one for one with the inflation rate increment.This ensures that inflation rate [produce a policy reation which cause increase in the real interest rate .

Principle 3-This principle say that Be forward looking - which means that the policy *(monetry ) actions affect the economy of the country with a lag like the cut in the interest rate have its impact (max.) on the real output for about 12 or 18 months and the inflation effect may take more . These lag means that the central bank of the country must be lokking forward.for example in 200 when the fed raised the rate of interest the inflation rate was same or low when the energy component and volatile foods are removed and that the FED acted as it concern that inflation could begin to rise .

Yes the monetry policy is an art which require the best decision , fine touch ,perfect startegies of policy maker .The feel of the correct moment to change the rate of interest , taxation ,inflation adjustment ect all take sceintifc approach or principle discussed above .It is indeed an art .The art of forecasting is another such thing .The impelementation of inflation forecast targetting require central bank should have the ability to forecast the future consition of economic which is not an easy task ,.

have a good day !