Chapter 15: Tools of Monetary Policy Flashcards
Tools of monetary policy
- open market operations
- changes in borrowed reserves
- changes in reserve requirements
- federal funds rate
arbitrage
buy low, sell high
shifts in reserves demand curve
- change in deposits changes R
- change in r
- change in expected deposit flows
- interest on reserves
Supply of Reserves
R_N + DL
Open market operation effects on fed funds rate when supply intersects demand in its downward sloping sections
- open market purchases cause fed fund rate to call
- open market sales cause fed funds rate to rise
Open market operation effects on fed funds rate when supply intersects demand in its flat section
no effect on fed funds rate
Discount rate change when demand intersects supply in vertical section
no effect on fed funds rate
Discount rate change when demand intersects supply in flat section
Reserves increases as discount rate decreases
Relationship between RR and Fed Funds rate
when the Fed raises reserve requirements, the fed funds rate rises
Relationship between interest on reserves and the Fed funds rate
when the fed funds rate is at the interest rate paid on reserves, an increase in the interest rate on reserves increases the fed funds rate
conventional monetary policy tools
open market operations, discount lending, and reserve requirements
dynamic open market operations
intended to change the level of reserves and the monetary base
defensive open market operations
offset movements in floats and Treasury Deposits which affect reserves and the monetary base
discount window
where banks can borrow reserves from the Fed
Types of discount loans
primary credit, secondary credit, and seasonal credit
primary credit
discount rate overnight loans
secondary credit
given to banks in financial trouble
- higher than discount rate
seasonal credit
given to meet the needs of a limited number of small banks in vacation and agricultural areas
- interest rate is an average of fed funds rate and CD rates
advantages of OMO
- initiative of the Fed
- flexible and precise
- easily reversed
- implemented quickly
zero lower bound problem
the central bank is unable to lower its policy interest rate
nonconventional monetary policy tools
liquidity provision, asset purchases, forward guidance, negative interest rates
liquidity provision
increases in lending to provide liquidity to financial markets
Asset purchase
buying large scale asset purchases to lower interest rates for particular types of credit
Forward guidance
attempts to influence the financial decisions by changing expectations of the future interest rate
negative interest rates
banks pay the Fed to keep their deposits
shifts in the reserves supply curve
- OMO
- discount rate
What does the Fed mainly use to conduct conventional open market operations?
US Treasury securities and US government securities
Two types of defensive OMO
repurchase agreements and reverse repos
standing lending facility
primary credit facility
advantages monetary policy tools outside of OMO
- interest on ER can change when banks have a lot in ER
- discount rate can be used as a lender of last resort
when is conventional monetary policy ineffective?
- financial system seized up
- zero lower bound problem
quantitative easing vs credit easing
- quantitative easing doesn’t always lead to increase in MS
- instead, credit easing can be used to alter the composition of the Fed’s balance sheet to improve credit markets
two types of commitments to future policy actions
conditional and unconditional
conditional commitments
if economic circumstances change, the Fed will abandon their commitment
unconditional commitment
if economic circumstances change, the Fed will not abandon their commitment
what is the disadvantage of unconditional commitments?
In cases when it is better to get rid of the commitment, the Fed might not go back on their word
what is a disadvantage of negative interest rates?
instead of using reserves for lending, the banks might change reserves into vault cash
