Central Banks & FED Flashcards
CB Responsibilities
(i) issuing currency; (ii) administering monetary policy; (iii) holding deposits representing bank reserves; (iv) executing open market transactions to facilitate smooth functioning of the financial system and protect the public interest.
CB Objectives
(i) price stability (controlling inflation); (ii) maintaining sustainable economic growth; (iii) stability of financial markets: interest rates, foreign exchange
CB Tools
(1) Monetary Policy: relates to the control of money supply and directly or indirectly, demand for money; (2) Fiscal Policy: related to government activity and is not direct by central banks, although governments take central bank advice into consideration.
How CB use Monetary Policy:
(i) increasing or decreasing short- term interest rates; (ii) reserve requirements; (iii) open market operations
How to use Fiscal Policy
(i) taxation, (ii) direct government investment and spending, (iii) fiscal policy can have a direct impact on both growth and inflation.
What is the FED?
Central Bank of the US| Twelve subsidiary banks; Governed by the Board of Governors; Federal Open Market Committee (FOMC)
What does the FED do?
(i) manages the discount rate (rate charged to institutions borrowing from the central bank); FED has a limited direct effect on bank borrowing, but acts as a proxy rate for other short-term rates that impact both institution and individual borrowers.
Long Term Objectives of the FED?
(1) Price stability (no specific inflation target); (2) sustainable economic growth