Central Banking and Monetary Policy Flashcards
What is monetary policy?
The management of the money supply and interest rates
What is the primary goal of the central bank?
- To provide their countries with price stability by controlling inflation
What is the purpose of central bank?
- Act as the regulatory authority of a countries monetary policy
- Sole provider and printer of notes and coins in circulation
- “Lender of last resort” to prevent failure of the banking system
- Provides the economy with funds when commercial banks cannot cover a supply shortage
What is an open market operation?
The Fed’s buying or selling of bonds in the open market
It is used to control short-term interest rates and money supply
Purchasing bonds = decrease in interest rates, increase in money supply
Selling bonds = increase in interest rates, decrease in money supply
What is discount lending?
The Federal Reserve facility that issues loans to banks at a discounted price
The discount rate is the price the Fed charges banks on discount loans
Why is discount lending from the Fed important?
The Fed Reserve is a “lender of last resort”
Prevents bank failures from spinning out of control - provides sources to banks when nobody else will
What is the problem with discount lending from the Fed?
Moral hazard problem - If a bank expects the Fed to provide it with discount loans when it gets in trouble, it will take on more risk
“Too big to fail” firms are most likely to take on these risks
The Fed need to be careful not to perform its function as lender of last resort too frequently
What are the 3 conventional monetary policy tools?
- Open market operations
- Discount lending
- Reserve requirements
What are the 3 non-conventional monetary policy tools?
- Liquidity provision
- Asset purchases
- Commitment to future policy actions
