Scribd
Upload
47 views18 pages

Course: 0062J Perekonomian Indonesia: Monetary Policy and Interest Rate Week 6

This document discusses various monetary policy tools used by central banks like the Bank of England and Federal Reserve to influence economic activity and inflation. It describes how monetary policy uses interest rates and the money supply to stimulate or contract the economy. The key tools discussed are open market operations, the discount rate policy, and reserve requirements. Open market operations are the most flexible and precise tool used by central banks to target interest rates.

Uploaded by

Edwa Warner
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
47 views18 pages

Course: 0062J Perekonomian Indonesia: Monetary Policy and Interest Rate Week 6

This document discusses various monetary policy tools used by central banks like the Bank of England and Federal Reserve to influence economic activity and inflation. It describes how monetary policy uses interest rates and the money supply to stimulate or contract the economy. The key tools discussed are open market operations, the discount rate policy, and reserve requirements. Open market operations are the most flexible and precise tool used by central banks to target interest rates.

Uploaded by

Edwa Warner
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 18

Course : 0062J

Perekonomian Indonesia
Monetary Policy and Interest Rate
Week 6
Macroeconomic Policies
Fiscal
Monetary
Supply side
Fiscal
Monetary
Supply side
Policy
Policy
Policy
Policy

Bank of England - MPC

Short term interest rate


Monetary Policy
(www.bized.co.uk)

• Attempts to influence the level


of economic activity (the amount of buying
and selling in the economy) through changes
to the amount of money in circulation and
the price
of money – short-term interest rates.
• Interest rates the key area of Monetary
Policy
Monetary Policy
• Short-term interest rates set by the Monetary
Policy Committee (MPC) of the Bank of England
• Meets for 2 days each month to decide on rates
• The ‘official rate’ is the rate at which the Bank
of England will lend to the financial system and
influences the structure of all other interest
rates
Monetary Policy
• Basis of Monetary Policy is that there is a long run
relationship between the amount of money and
inflation
• Demand for Money – the amount people wish to
hold as cash as opposed to other assets
• The Supply of Money – the amount
of money in circulation in the economy
Monetary Policy
• The Classical Quantity Theory of Money:
MV = PY
(where M = the money stock, V = velocity of circulation, P = price
level and Y = level of national income)
• More formally:
Md = k PY
where:
– P is the price level
– Y is the level of real national income
– Md is demand for money for transactions purposes
– K = proportion of national income held as transactions balances
Monetary Policy

• In equilibrium
Md = Ms

– So: P = 1/kY x M
– A rise in Ms will lead to a proportional rise in P
Monetary Policy

• Supply of Money:
• Narrow Money – notes and coins
in circulation (M0)
• Broad Money – Notes and coins plus money held in
bank and building society accounts (M4)
• A rise in either (ceteris paribus) might signal
a rise in aggregate demand (AD)
Monetary Policy
Terms in Chapter 26 (Case, Fair, Oster, 2012)

Looking Ahead: The Federal Reserve and


Monetary Policy
• tight monetary policy Fed policies that contract
the money supply and thus raise interest rates in
an effort to restrain the economy.
• easy monetary policy Fed policies that expand
the money supply and thus lower interest rates
in an effort to stimulate the economy.
Tools of Monetary Policy
(Mishkin, 2013, chapter 15)
• Open market operations
– Affect the quantity of reserves and the monetary base
• Changes in borrowed reserves
– Affect the monetary base
• Changes in reserve requirements
– Affect the money multiplier
• Federal funds rate—the interest rate on overnight loans of
reserves from one bank to another
– Primary indicator of the stance of monetary policy
Open Market Operations
• Dynamic open market operations
• Defensive open market operations
• Primary dealers
• TRAPS (Trading Room Automated Processing
System)
• Repurchase agreements
• Matched sale-purchase agreements
Advantages of
Open Market Operations
• The Fed has complete control over
the volume
• Flexible and precise
• Easily reversed
• Quickly implemented
Discount Policy

• Discount window
• Primary credit—standing lending facility
• Secondary credit
• Seasonal credit
• Lender of last resort to prevent
financial panics
– Creates moral hazard problem
Thank You
15-14
Advantages and
Disadvantages of Discount Policy
• Used to perform role of lender of
last resort
• Cannot be controlled by the Fed; the decision
maker is the bank
• Discount facility is used as a backup facility to
prevent the federal funds rate from rising too far
above the target
Reserve Requirements
• Depository Institutions Deregulation and Monetary
Control Act of 1980 sets the reserve requirement
the same for all depository institutions
• 3% of the first $48.3 million of checkable deposits;
10% of checkable deposits over $48.3 million
• The Fed can vary the 10% requirement between 8%
to 14%
Disadvantages
of Reserve Requirements

• No longer binding for most banks


• Can cause liquidity problems
• Increases uncertainty
• Recommendations to eliminate
Thank You

You might also like