9. Both advanced economics and developing countries have experienced a decrease in inflation since the 1980s (see Table 3-3 in the text). This question considers how the choice of policy regime has influenced such global disinflation. Use the monetary model to answer this question.

a. Consider a period when the Swiss Central Bank targeted its money growth rate to achieve policy objectives. Suppose Switzerland has output growth of 2% and money growth of 3% each year. What is Switzerland’s inflation rate in this case? Describe how the Swiss Central Bank could achieve an inflation rate of 2% in the long run through the use of a nominal anchor.

b. Consider a period when the Reserve Bank of New Zealand used an interest rate target.

Suppose the Reserve Bank of New Zealand maintains a 5% interest rate target and the world real interest rate is 1.5%. What is the New Zealand inflation rate in the long run?

In 1997 New Zealand adopted a policy agreement that required the bank to maintain an inflation rate no higher than 2.5%. What interest rate targets would achieve this objective?

c. Consider a period when, prior to euro entry, the central bank of Lithuania maintained an exchange rate band relative to the euro—at the time this was a prerequisite for joining the Eurozone. The rules said that Lithuania had to keep its exchange rate within ±15%

of the central parity of 3.4528 litas per euro. Compute the exchange rate values corresponding to the upper and lower edges of this band. Suppose PPP holds. Assuming Eurozone inflation was 2% per year and inflation in Lithuania was 6%, compute the PPP-implied rate of depreciation of the lita. Could Lithuania maintain the band requirement? For how long? Does your answer depend on where in the band the exchange rate currently sits? A primary objective of the European Central Bank is price stability (low inflation) in the current and future Eurozone. Is an exchange rate band a necessary or sufficient condition for the attainment of this objective?