Central Banks Flashcards
What are the main OMO’s the ECB can do?
MRO and LTRO
What does OMO mean?
open market operations
What does MRO mean?
Main Refinancing Operation
What does LTRO mean?
Long term Refinancing Operation
What does TLTRO mean?
Targeted Long term refinancing operation
What is the maturity of a LTRO?
3 months to 3 years
What is the maturity of TLTRO?
Up to 4 years
What is the objective of OMOs?
steer interest rates and control monetary mass in circulation
What is the objective of a MRO?
Providing short-term liquidity to banks and pilot short-term rates
What is the objective of a LTRO?
Providing medium-to-long-term liquidity to banks
What are the criteria to access an MRO?
- subject to prudential supervision
- having an account at the central bank
- provide collateral (government or high-quality corporate bonds)
How do you do an MRO?
You enter a reverse repurchase agreement (reverse REPO) where the ECB buys the collateral at first and the bank will repurchase it back at the end of the MRO
What is the maturity of an MRO?
A week
What are Standing Facilities?
Monetary policy instruments that enable the European Central Bank (ECB) to provide or absorb overnight liquidity in the financial system
What are the different types of standing facilities?
- MRO
- MLF
- DF
What is MLF?
Marginal Lending Facility, it’s the ceiling for interest rates in overnight narkets
What are DFR?
The floor for the overnight interest rates. They’re the return banks get when they deposit money at the ECB overnight
What is quantitative easing?
The ECB PURCHASES large quantities of government BONDS and other assets from financial markets thus injecting cash into the system to lower lower interest rate. LONG TERM ACTIONS AGAINST DEFLATION.
What is DF
Deposit Facilities
What is quantitative tightening?
The ECB SELLS large quantities of government BONDS and other assets from financial markets thus taking away cash for the system. LONG TERM ACTIONS AGAINST INFLATION.
What are the instruments used to fight against deflation?
- Interest rate policy
- quantitative easing
How to use interest rate policy to fight deflation?
Lowering interest rates making credits more accessible it encourages investment and spending. SHORT TERM ACTIONS AGAINST DEFLATION.
What are the dangers of too much liquidity in the market?
- If the assets the ECB owns decrease in value, or the bonds default as the interest rate rises they can get looses. Creating the chance the ECB looses equity and even default itself.
- fuel inflation
What is APP?
Asset Purchase Program: how many assets the ECB buys => increase liquidity
How do you fight against inflation?
- increase interest rates
- quantitative tightening
What is quantitative tightening?
ECB sells back the bonds they bought or lets them expire, reducing the cash in circulation
