Ch. 22 - Monetary Policy Flashcards
What is Monetary Policy?
The process of setting interest rates in an effort to influence economic conditions
What is an inflation target?
A publicly stated goal for the inflation rate (2%)
What is a zero lower bound?
The constraint that nominal interest rates cannot be effectively set below zero
What is an overnight rate?
The interest rate that the bank targets as its policy interest rate/ The overnight rate is the nominal interest rate that banks pay to borrow from each other
What is the policy rule of thumb?
The recipe that describes how the bank often sets the interest rate
Overnight Rate - Inflation = Neutral Real Interest Rate + 1/2(Inflation - 2%) + Output Gap
What are reserves?
The cash that banks need to keep on hand to make payments
What is the Deposit Rate?
The interest rate the bank pays on funds deposited overnight
What is the operating band?
The range for the overnight rate between the deposit rate and the bank rate
What is the overnight repurchase agreement?
When the bank buys a government bond from a financial institution, with an agreement to sell it back the next day at a higher price
What is a reverse repo?
When the bank sells a government bond to a financial institution, with an agreement to buy it back the next day at a higher price
What are open market operations?
The Bank of Canada’s buying and selling of government bonds to influence the overnight rate
What is forward guidance?
Providing information about the future course of monetary policy in order to influence market expectations of future interest rates
What is quantitative easing?
Purchasing large quantities of longer term government bonds and other securities in an effort to lower long-term interest rates
What is Lender of Last Resort?
The Bank’s role as the lender that financial institutions turn to when they are having trouble getting loans
