Lesson 48- Role of Central Banks Flashcards
What are two of the main functions of central banks?
.Monetary policy function-QE, exchange rate intervention and interest rates
.Financial stability and regulatory function
.Policy operation functions
.Debt management
What is the main aim of the bank of England?
To promote monetary and financial stability
What is expansionary monetary policy?
This is monetary stimulus and involves changes in monetary policy designed to increase aggregate demand including lower policy interest rates and measures to increase the supply of credit
What is contractionary monetary policy?
These deflationary policies are designed to lower the level/growth of aggregate demand to help control inflationary pressure
What policies fall under contractionary monetary policy?
.A rise in interest rates
.Tighter controls on bank lending
.Attempts to cause an exchange rate appreciation which would lower import prices
Give two reasons for maintaining very low interest rates
.Inflationary measures in many countries have been weak giving little justification for raising interest rates to counter inflation
.Some economists argue that the Phillips curve has flattened-this implies the economy can operate at a higher level
.Maintaining low interest rates helps to stimulate capital investment, which increases a country’s long run aggregate potential
.Low interest rates have helped support aggregate demand and output during eras of austerity
.It can help reduce the effects of price deflation
Why do some economists argue that advanced economies would benefit from a rise in interest rates
.It helps control the demand for credit, softens the growth of money supply and helps control demand pull inflation
.Increased mortgage prices help cause a slowdown in house price inflation
.High interest rates increase the return to saving
.Reduce the risk of mal-investment by business that only goes ahead because of cheap capital costs
.Interest rates need to rise so banks can cut them in the event of a negative external shock
Give two risks from raising interest rates
.High levels of unsecured debt
.Higher interest rates might stop much needed business investment
.Govt debt becomes more expensive
.Could cause the exchange rate to appreciate which could make exports less attractive
What is quantitative easing?
It is an alternative strategy to cutting interest rates in an attempt to increase the supply of money to banks to lend
What does QE introduce?
It involves the introduction of new money into national supply by a central bank
What can a increase in the demand for govt bonds cause?
It causes an increase in the market price for bonds
Give an argument for quantitative easing
.Gives a central bank an extra tool of monetary policy besides changing interest rates
.Increasing the monetary base helps to lower the threat of price deflation
.Lower long term interest rates have kept business confidence higher
.QE can lead to a depreciation in the exchange rate, which helps improve price competitiveness of exports
Give two criticisms of quantitative easing
.Ultra low interest rates can keep alive zombie companies
.QE has contributed to a surge in share prices and property values which has worsened housing affordability
.QE has done little to increase bank lending to businesses, many commercial banks have become risk adverse
.
What does regulation of financial markets help overcome?
One or more market failures
What is a liquidity ratio?
This is the ratio of liquidity assets held by a bank on their balance sheets to their overall balance sheets
