0. Macro Flashcards
what is econ
study of how an economy allocates resources and goods to various uses
3 schools of thought ;
- classical
-Keynesian
-monetarist
also macro and micro econ
Adam Smith - 4 key economic theories
- Division of labour
-key to increased productivity is to divide labour into a series of repetitive tasks perf by diff people
- spurs innovation and progress - Labour Theory of Value
-value of a good/service is determined by amount of labour req to produce it
- encourages firms to reduce costs and increase efficiency - Free market philosophy
- individuals pursuing their own self interest would result in best outcomes for society as a whole
- idea of the invisible hand - GDP
- productivity is a result of a country’s ability to accumulate capital through a series of interconnected markets
- saw economy as an interconnected system where production, consumption and exchange all influence each other to create positive or negative growth.
micro vs macro
MICRO
- studies how indivs and businesses allocate resources efficiently
-decisions concerning distro of recourses and prices of goods/servs
- Prices and equilibrium within a single market
- Production curve of a company
- customer utility curves
- Individual savings rates
- Regional housing markets
MACRO
-aggregate behaviour of a wider pop (i.e. whole economy) not just an indiv/company
- Gross Domestic Product (GDP)
-Foreign exchange rates between markets
-Interest rate levels and curves
-Consumption spending patterns
-Unemployment rates in the economy
-Inflation levels
-Government debt and taxes
-Fiscal spending and monetary policy
what is supply and demand
the provision of goods and services, the funds to pay for them, the provision of labour and the supply of wages all result from the interaction between households and firms
Key diff between Keynes + Monetarist is whether supply or demand drives initial momentum
supply and demand curves
demand curve
- downwards sloping
-quantity demanded increases as price falls
-applies to spending on goods/servs, demand for labour and loans
supply curve
- upward sloping
-businesses willing to supply more @ higher price
- applies to money supply or size of workforce @ different wage levels
4 factors of production
major inputs required for producing goods/services in order to produce income
land - rent
labour - wages
capital -interest
enterprise - profit
output = sum of returns from the factors of production in the economy
can be considered building blocks of economy
(modified circular flow of economy)
circular model showing how firms supply goods/serv to meet demand of household in return for payments (outer circle)
and how households supply labour, land, capital and entrepreneurship to meet demands of firms in return for wages, rents, interest and profits
INJECTIONS
investment - expenditure of firm when they build infrastructure
gov spending - provides capital expenditure
exports - injection of expenditure by foreign consumers
LEAKAGES
- imports - goods/servs brough into economy from foreign suppliers causing monetary outflow
- tax - money removed from flow and transferred to go (may be partially offset by expenditure)
-savings - portion of household incomes not used for current expenditure
sources/motivations/impact of these flows is what leads to different schools of econ thought
Classical school highlights
-aka free market/ capitalism / laissez faire
-no gov intervention
-consumers and producers decide on the prices of goods/serv and firms try to produce as cheaply as possible
-private ownership of production provides incentives
-wages and price are flexible causing inflation and unemployment to be temporary
Classical school - 2 big theories
The invisible hand
- metaphor for unobservable forces where decisions of indivs acting in own self interest combine @macro level to help supply of goods/serv in free market to automatically reach equilibrium
Say’s Law
- income generated by past production and sale of goods is the source of spending that creates demand to purchase current production - i.e. supply of a good/serv will create its own demand
Laffer curve
Laffer = supply side economist
shows relationship between tax rate and total tax revenue
Above optimal rate - people are disincentivized to work thus resulting in reduced revenue generation
Keynesian Econ origin
John Keynes saw classical school wasnt recuing econs from great depression - supply not generating sufficient demand
Paradox of thrift - postulates that personal savings are a net drag on the economy during a recession tho it makes sense on a household level to reduce spending during tough times
-disconnect between indiv and group rationality
- calls for lowering rates to boost spending during a recession
Keynesian economics
central belief = gov intervention can stabilize economy
mixed econ - guided by priv sector with gov intervention
economy lead by demand
advocated net gov spending (more than it receives through taxes)
Principle concern in unemployment - wages are downward sticky leading to rise in unemployment during recession
MPC
Marginal propensity to consume - Keynesian Econ
considers what proportion of any additional unit of income would be spent vs saved i.e. amount of disc spending i.e. MPC
MPS = 1-MPC
MPS = marginal propensity to save
MPC is not constant- can change due to confidence levels of indivs and their appetites
income is primary influence but others include accumulated net worth, stage in business cycle etc
Private sector demand
Inc spent by households is considered to be consumption income
Consumption function (C) - expresses how much inc will be spent
C = a + cY
c= MPC
C= total amount consumed
a=min amount of consumption required for survival
Y = total disposable income
When C is below Y=E then income exceeds expenditure implying savings
Where C is above, consumption is funded elsewhere (prev savings, debt, benefits etc)
Aggregate demand
Keynes - no natural tendency for econ to operate @ full employment, instead gov much manage agg demand
- can do this by stimulating priv sector investment, increasing gov spending, increasing exports/reducing imports, decreasing savings and taxation
Agg demand = C + I + G + (X-M)
C= planned cons expenditure
I = planned inv expenditure by bus
G=planned gov expenditure
X-M = planned net exports
Multiplier effect
ME in closed econ = 1 / (1-MPC)
According to multiplier effect : effect of any government investment on a capital project would be more than the value of the injection
way to manage demand via increased gov expenditure/ stimulating investments/increase exports or decreasing savings/tax
Multiplier effect and money supply
Keynesian econ
Lending deposits by banks increases money supply without increasing actual amount of currency (credit creation) - should theoretically lower interest rates, generate more investment, increase spending as more £ in consumer hands
CB/govs can tighten money supply by increasing reserve reqs - which increases lending selectivity of banks
Basel III
- implemented in 08, imposed greater minimum cap reqs on banks
-introduced liquidity cover ration and net stable funding ratios
Philips curve
Adopted by Keynesian economists
suggests inverse relationship between unemployment and inflation acc to 19th/20th century data
if unemployment is high, wages rise only moderately. Conversely, if unemployment is low then wages rise more strongly, on the basis that there is less surplus labour available, so firms must pay more to counteract the scarcity of supply
relationship can vary by economy and across industries
curve has flattened in recent decades due to increased globalization and digitization/decreased unionization/increased migration to Uk from other countries increasing supply of labour
Monetarism origin
Milton Friedman - believed Keynesian distorted true supply/demand
belief that manipulation of aggregate demand and increased money supply lead to stagflation in 70s
monetarists have more in common with classical economist than keynesian, but classicals reject key tenet of monetarism
= the most important policy is to maintain control of money supply
market should be allowed to work efficiently but with controlled money supply
principle concern is inflation - distorts markets and must be addressed before any other economic issues
Monetarists view on money supply
Believe that as money supply increases - demand increases - production increases so jobs increase.
increased money supply = short term boost to economy
over LT, demand will outstrip supply, prices will rise to match leading to inflation
Fisher Equation
Monetarism is based on Fisher eq
MV = PT
M= money supply
V=velocity of circulation
P= avg price
T = total volume of transactions
Monetarists argue V is stable over time and T is grows SLOWLY as productive capacity of economy gradually expands SO relationship between M&P is the key to determining level or prices
Natural unemployment
Monetarists believe that natural unemployment arises due to misperception by employers of true supply conditions of labout in the market
=the unemployment rate that persists in a well-functioning, healthy economy that is considered to be at “full employment” - hypothetical rate that says employment will never be 0
so = unemployment can be explained through frictions and distortions in labour market (e.g. immobility of labour/inadequate training) on the basis they bring about mispricing of labour
Supply side economics
Monetarist critique of labour market gave rise to Supply side econ - school of through t advocated for by monetarists
-markets should be as free as poss
- removal of supply side frictions (in labour market, taxation, customs on international trade) will remove distortions in market and allow supply and demand to work properly
belief that demand manafement will produce full employment, but also expand money supply and create inflation
core principles of econ schools
role of gov
fiscal policy
supply
demand
inflation
wages
unemployment
Application of economic theories
Economic theories are implemented by politicians not economists
two barriers to pure application
1.political compromise
2.open vs closed economies
- closed = less dependent on foreign trade/investment
Keynesian policies adopted during times of low international trade - increased globalization/more international trade/dependency on international trade/funding deficits = reduced need for keynesian policies
easier to adopt pureer forms of econ theory if economy is insulation from FX fluctuations ‘(e.g. eurozone)
business/economic cycle
PEAK
- GDP grows rapidly + high levels of activity. Bis operating @ full capacity, low unemployment, inflationary pressures, deterioration in balance of payments, asset prices subject to bubbles
- IR increased to dampen demand and inflation
CONTRACTION
- slump/deceleration - GDP typically contracts (or grows more slowly) due to demand reduction
- unemployment increases
-recession if GDP contracts for >2 consecutive quarters
TROUGH
- slowing ceases, economy hits a bottom from which recovery emerges
-high unemployment, weal reatil sales, deflation
-IR cut to boost the economy
RECOVERY
-expansion/acceleration
- economy is growing - if this lasts long enough economy will enter a boom period
GDP vs GNP
Gross domestic product (GDP) is the value of the finished domestic goods and services produced within a nation’s borders.
Gross national product (GNP) is the value of all finished goods and services produced by a country’s citizens, both domestically and abroad
GNIhas broadly replaced GNP
Perfect competition
Microeconomics
PC = theoretical representation of how a free market would operate where no one buyer/seller can influence price of a single homogeneous product
PC firm operates in industry w/ infinite number of firms, each accepting market price of homogeneous product set by interaction of supply/demand
PC generates normal profits i.e.e enough to cover total costs and remain competitive
Characteristics of perfectly competitive industry
- No one firm dominates
- Firms do not face any entries to barriers
- A single homogenous product is produced by all firms
- There is a single market price and place at which all output produced by 1 firm can be sold
- Infinite number of consumers
- Perfect information about the product, price and firms’ outputs is
available to all
If one firm was earning ‘supernormal profits’, then other firms would enter the market, supply the good, and thereby drive down the availability of profits until the supply matched the demand and supernormal profits were eroded.
Monopoly and oligopoly
Occurs when comps gain market power allowing them to take advantage and create inefficiencies due to imperfect competition
-i.e. artificially fixing prices and moderating output
Monopoly = single market supplier of prod
oligopoly = limited number of highly independent firms dominate the industry
UK public utilities/ tech companies often operate @ near monopolies
asymmetry of information
Different degrees of knowledge available to parties in a transaction
- e.g. borrower and lender (borrower has more info about their financial state than lender)
can lead to frictions in labour market - fluctuations in unemployment and sluggish wage growth
- employer cannot know how hard prospective employee will work
information gaps lead to
- adverse selection
-inefficient resource allocation
-incorrect setting of prices
=and therefore can lead to market failure
Production Costs and Economies of Scale
Firms maximise profit by producing @ level of output where marginal costs are equal to marginal revenue
- firms will produce additional unit where extra rev generated by sale =cost of production
output must exceed production costs to make normal profit
as firms productive capacity increases - they can benefit from economies of scale - lowering costs and making production more efficient
production cost minimised @ MES (min. efficient scale)
beyond this point = diseconomies of scale
may be caused by lack of space for employees to work at max capacity e.g.
effect of inflation on asset classes (5)
contagion
= the spreading of events occuring in one market to another - increased by interconnectedness of world economies (supply chains, tech, travel etc)
- causes systemic risk in financial system
-e.g. widespread run on US banks in 1930s after wall street crash had worldwide impact
- liquidity crisis that started in 07 and became a GFC
low income countries - e.g EM = less likely to be able to expand fiscal spending due to tighter financing constraints, may have limited scope to loosen monetary policy
-w/out supportive measures bis cycle is likely to shift rapidly from growth to flat as country enters recession = hard landing
Higher inc countries = can finance larger deficits, greater scope to loosen monetary policy and more QE - can lessen negative consequences and lead to soft landing
which sectors may be in favour @ each point of economic cycle
assuming investors know where in cycle the economy is and the extent to which the sector is operationally geared to the cycle
- doesnt provide latitude for sudden events that may spark sudden flight between asset classes
economic factors impacting equities
Sector
-cyclical vs defensive
-energy, services, staples, utilities etc
Size
- larger companies may have extra financial cushion to help during tough economic times
-typically SMIDS fare worse in recession as are less liquid and may be less financially resilient - tho they bounce back faster as more nimble and grow more rapidly in recovery
Debt levels
-highly indebted comps may more more vulnerable - as they have to continue to service debt even if profits are weak
-diverts profits from reinvestment
- also may suffer is debt isnt fixed and rates are rising
-low levels of debt tolerate weaker periods of profitability better
Value vs growth stocks
Value
- typically ‘old economy’ (mining, oil, gas) that tend to pay out more of earnings as divi vs reinvesting
-pay high divi
-relatively immune to rising rates as investors place more emphasis on earnings generated today
Growth
-rapidly expanding industries
- strong future earnings growth
-Low/no divi, profits reinvested for expansion
-underperform in high rate environments as more emphasis is on LT prospects which may be eroded by inflation - worse if highly indebted
Capital vs money markets
CAPITAL MARKETS
- Raising and investing LT capital (>1 yr)
Primary markets
- issuance of new secs (IPO. loan stock, bonds)
Secondary markets
- To allows trading of secs that have already been issued, and provide liquidity to capital markets
MONEY MARKETS
- raising ST (<1 yr) capital
- liquidity and short term funding
-largely decentralized network of interconnected wholsesale markets
- primary network = interbank market (wholesale funding between banks on v ST basis)
- SONIA, SOFR or TONA rates of interest
globalisation
-Interrelated and interconnected nature of bis and financial systems
- How prods/servs/lifestyles are becoming increasing similar around the world
2 orgs that have helped globalization
WTO
- aim = liberalization of trade laws between countries through use of global multilateral agreements
- forum for govs to negotiate
OECD - org for economic coop and dev
- aims to help contribute to world trade and support sustainable economic world growth
good - enables poorer countries to participate in international trade
bad - loss of national identities, rise of multinationals with huge size beyond control of gov/reg
offshoring
-outsourcing staff functions overseas - result of fast/efficient telecomms
- fewer branches with centralized functions
-offshoring of staff functions to overseas centres where appropriately skilled labour is cheaper
- cross border businesses
-accelerated by COVID
What are CPI and RPI
CPI
- lower
- Historically HICP in Europe - measures change in fixed set of goods (basket depends on economy)
- Geometric average - weighted avg price change by importance of good
- excludes housing costs, includes unit trusts/uni accom/stockbrokers
- all households
CPI-H = CPI + owner occupier housing costs
CPI- Y = CPI - indirect taxes
CPI - CT = CPI with contract indirect tax rate
RPI
- higher
- 700 goods and services
- arithmetic avg
-includes mortgages and rent payments
-excludes highest earners and pensioners households
RPI-X = RPI - mortgage repayments (which reflect base rate used to control inflation)
RPI - Y = RPI - mortgage repayments and VAT
Other inflation measures
US
- CPI-U – all urban consumers
- CPI-W – urban wage earners and clerical workers
Hong Kong
CPI (A) – low expenditure households
CPI (B) – medium expenditure households
CPI (C) – high expenditure households
PPI
Purchasing price index - measures change in prices going into production process - including raw mats and other inputs
3 main areas of classification
- commodity PPI = changing costs of input mats (crude goods); iron ore, wheat, soy beans
- Stage of processing PPI - changing costs of prices in intermediary stages of production (refined sugars, leather, paper, chemicals)
-Core PPI - finished goods (shoes, soap, furniture) - this is the most watched
viewed as an earlier predictor of inflation than CPI as tracks price changed before goods reach consumer - changes in raw mat price tend to be passed on to consumer
Output (or factory-gate) prices measure the changes in the price of goods as they leave the production process and enter the retail sector. There is obviously a very strong relationship with input price
Sources of inflation
Demand pull = traditional based on classical views of supply and demand. Demand outstrips supply, causing prices to rise. traditional remedy is to deflate demand by fiscal/monetary policy
Cost push = increase in prices of factors of production - costs passed on to consumer in higher prices for final goods (2022 Russian invasion)
Imported inflation = increase in imported goods leading to decline in external value of currency - may need to manage exchange rates (tho increasingly accepting govs cant really set FX rat)
Monetary = caused by excess money supply
problems of inflation
economic indicators - position in cycle
Procyclic - rise in period of economic expansion
- GD, rate of growth of consumer spending, employment, investment
Countercyclic - move in opp direction of economic growth trend
- unemployment
Acyclic - no relation to growth phases of economy and not useful for forecasting
Economic indicators - timing
Leading - change before economy, useful short term predictors
- stock market, PMI, index of consumer confidence. building permits, money supply
Lagging - change after economy (typically a few quarters)
- unemployment, CPI, interest rates
Coincident - change @ same time as economy
- GDP, retail sales, personal income
PMI
Purchasing manager’s index
index of prevailing direction of econ trends in manufacturing and service sectors
- derived from monthly questionnaires from private sector comps
-identify MoM changes in range of areas
- bis output, employment, costs, selling prices, purchasing activity etc (-1 to +1 score
index reading 50 = no change
index reading >50 = improvement
<50= decline
labour market
most critical stat is level on unemployment (i.e. no. of people seeking employment but unable to find work
influences investor sentiment and consumer confidence
3 types
- Structural = mismatch between jobs avail and skill level of unemployed
- frictional - result of people moving between jobs (resignation, seasonal, termination)
-cyclical =result of downturns in economic cycle
Balance of payments
compares inflows and outflows of all exports and imports to provide a balance
- positive balance = more money flowing in
-negative balance = more money flowing out
3 accounts must balance collectively
CURRENT ACC (balance of trade)
- imports and exports
-ST flows of money in and out
-visibles (products)
-invisibles (services)
CAPITAL ACC - financial transactions not affecting income, production or saving e.g. copyright
FINANCIAL ACC - transactions for increases/decreases in the ownership of assets
+balancing item - to correct any statistical error and ensure accounts balance
Balance of payments defecit/surplus
BoP deficit (or surplus) is a deficit (or surplus_ on the current account
deficit = imports exceed exports - will need to be corrected over LT as foreign investors will not finance the deficit indefinitely
small neg balance - can run down reserves (cannot do this indefinitely)
borrow to finance deficit - also wont work forever as greater servicing requirements
can allows currency to fall in value to rectify = imports become more expensive and exports become relatively cheap
financing with debt can create concerns about stability of econ - so gov raises rates to prevent outflow of funds. higher rates encourage foreign investment which strengthens the currency which is obvs at odds with trying to manage curr acc deficit
PPP
PURCHASING POWER PARITY
Econ theory - states that exchange rate between 2 currencies is in equilibrium when their domestic purchasing powers are equivalent
i.e. if big mac if 5 USD and 5USD is 4GBP then big mac should be 4GBP
compares economic productivity and standards of living between countries
Drawbacks
- tax differences
-tariffs on imported goods
Nominal GBP values can be misleading because currencies may be manipulated. GDP by PPP allows a fairer comparison of GDP between countries with different currencies
Fixed or floating exchange rates
Fixed (pegged) exchange rate system = exchange rate fixed against another currency (e.g. USD)
to maintain - gov must have lots of foreign currency reserves to actively intervene in markets
most attempts at fixed systems have baso failed
Floating exchange rate system = currencies allowed to float freely in market and find its own level
some pegged to USD and some pegged to a balance of currencies = crawling peg
Currency appreciation
if currency appreciates = worth more in terms of foreign currency
- exports become more expensive (so fewer goods demanded)
-exports go down/contraction in demand
-imports become cheaper and demand increases
-aggregate demand falls, leading to lower growth
-inflation falls - cheaper prices for imported goods, lower agg demand and less demand pull inflation
currency depreciation
depreciation in floating rate system
devaluation in fixed rate system
= fall in value of currency
- more competitive exports, increased demand
-more expensive imports, reducing demand - higher growth and rising agg demand
-potential increased inflation due to increased agg demand and demand pull inflation
-more expensive imports can cause cost push inflation
-improvement in curr acc balance of payments
Reserve currencies
= foreign currency held in significant quants by gov/central bank/major financial instit
used for international transactions/investments
major reserve currencies are USD, euro, Yen, CHF, GBP, yuan, AUD and CAD
attractive = proven track record od stability, well developed market to dispose currency in with wide acceptability
FX market
dominated by international trade
- purchasing overseas assets
-foreign currency needs of travellers
no central marketplace - international network of major banks and currency dealers
24hr market - 4 major trading sessions; Sydney, Tokyo, London, NY. hours of overlap where 2 sessions open @ once = busiest
T+2
Currency trading
Trading done in pairs - common
USD/JPY
EUR/USD
USD/CHF
GBP/USD
1st = base currency
2nd = counter currency
1:x
quote
EUR/USD (base currency not mentioned)
1.1640/60
Buying euros - higher price
International Fisher Theory
diff in nominal IR rates between 2 countries will determine movement of exchange rates
(1+r)=(1+i)(1+R)
Fiscal, monetary, exchange rate policy
Fiscal = use of government spending and taxation to influence the economy
set by Gov
Monetary = Decisions around IR and money supply
Set by central bank
ER policy = manner country manages its currency in respect to foreign currencies and the foreign exchange market
Keynesian view on fiscal policy
Need for active fiscal policy
as means to stimulate demand in period of weak private sector demand and investment
to avoid deflationary spiral
not concerned with PSNCR
Monetarists believe deficit would lead to inflation and higher IR post recovery
3 types of fiscal policy budgets
- Budget surplus – government revenue > government expenditure.
- Budget deficit – government revenue < government expenditure.
- Balanced budget – government revenue = government expenditure.
Types of fiscal policy
Expansionary
- financing spending with borrowing
-spending increase can lead to increase in real GDP
Could result in inflation if economy @capacity
Contractionary
- collecting more in taxes w/out increasing spending
-may raise tax deliberately to take inflationary pressures out of economy
Neutral
- Collecting more in taxes to increase spending = diversion of income from one part of economy to another
PSNCR
Public sector net cash requirement
- annual excess spending over income for entire public sector = cash needed to finance gov activity
- Combined financial deficit of central government + local government + public corporations
Chancellor sets PSNCR each year, then DMO responsible to issue gilts to achieve borrowing required
Direct Taxation
charges levied on income/wealth - said to be progressive
Income tax = paid by indivs from their earnings
-varies widely between country
- UK personal allowance = 12570 (reduced by 1 for every 2 earned over 100k)
NI - tax on earnings and self employed profits, enable indivs to build up benefits e.g. state pension
CGT = applies to chargeable gains on asset sales (annual exemption of 6k, then 10/20% for basic or higher rate - 18/28 for property)
IHT = charged on certain transfers of property (not just death). 325k nil rate band then 40% (36% if >10% estate is left to charity)
residence NRB = 175k
Council tax = local taxation system based on value of property not income of indiv thus can be regressive
Corp tax = 25% on profits over 250k. 20% for unit trusts and OEICs
indirect taxation
charges levied on consumption or expenditure
VAT (value added tax)
- % of expenditure, 20% in the UK, aka goods and serv tax
Financial transaction taxes
- imposed on sale/purchase/transfer if financial transactions
-stamp duty in UK, 0.5% of share purchases
policy lags
takes time for policies to affect economy once implemented
fiscal policy lags longer than monetary policy - also takes long time for proposed tax change to become law
UK monetary policy
Set by: MPC of the BofE
Objective: support gov econ objectives
Inflation target: 2% +/- 1
Tools: base rate and QE
EU monetary policy
Set by: ECB - sets rate on main refinancing, deposit facility and marginal lending facility
Objective: maintain price stability by keeping HCIP close to but below 2%
Inflation target: 2% over medium term (ceiling but no floor)
Tools: negative rates, LT bank loans, asset purchase programmes
US monetary policy
set by: Fed
Objective: promote max employment, stable prices and moderate LT rates
Inflation target: average 2% target
Tools: OMO, reserve requirements, discount rates, interest on reserves
China
set by: PBOC
Objective: maintain currency stability (domestic prices and exchange rate) + promote economic growth
Inflation target: 3%
Tools: OMO, reserve requirement ratio, loans to vanks
India
set by: MPC of RBI
Objective: maintain price stability
Inflation target: 4% +/- 2% tolerance band set by Indian gov
Tools: repo rate, OMO, cash reserve ratio, statutory liquidity ratio
South Africa
Set by: MPC of SARB
Objective: protect value of rand and maintain price stability
Inflation target: 3-6%
Tools: repo rate
Direct credit controls
Restrictions on commercial banks in the provision of credit to customers
- influence demand for bank credit by making borrowing less desirable (expensive, stringent)
general controls = regulate total lending power of system
selective controls = regulate credit taken for specific purposes
Capital controls
Actions taken by a government, central bank or regulatory body to limit the flow of foreign capital into/out of an economy
Keynesian economic ideas were effective in US and UK for long - maybe because times of low international trade @ implementation
discourage flow of capital by imposing costly rules (taxes/tariffs)
why?
-help economic growth
-protect economy
-limit currency movement
QE
Method of increasing money supply first adopted by BoJ (then widely post GFC)
- when cutting rates isnt working (may be too low to cut further)
CB creates money by increasing reserves held by commercial banks at the central bank
uses money to buy secs (debt/MBS/equity) from financial instits
size of banks balance sheet shrinks and CB balance sheet expands
less pressure on commercial bank balance sheet - should increase borrowing which will increase liquidity
has resulted in an increase in asset prices in practicality - not increases spending
QT
Quantitative tightening
CB selling balance sheet assets thus reducing money supply in the economy
contractionary = decreases amount of liquidity
