Macro Minor Flashcards
Monetary targeting
The central bank announces that they willAchieve certain value of the annual growth rate of monetary aggregate eg 5% growth of M2
Relies on a stable money inflation relationship
Inflation targeting
Public announcement of medium-term numerical objectives of inflation
Use more than the money variable to determine the best setting for monetary policy
Monetary policy without an implicit nominal anchor example of the United States
Forward-looking behaviour, required by long lags
Fed reserves have a concern to control inflation in the long run
Non borrowed reserves
Determined by central banks open market operations
Borrowed reserves
Obtained by banks through standing lending facility
Open market operations
Purchase or sale of security by CB
Increases the money base by increasing R
Affect H through” non borrowed R”
Repurchase agreement
The Bank of England buys security from the commercial bank which agrees to re-purchase it at specified period at a slightly higher price. the effect of this agreement is that the Bank of England has made loan to a commercial back and holds an equivalent value of gilt. the bank repurchases them to pay off the loan
Add to the security of Bank of England and reserves of commercial banks( securities are reduced)
Standing lending facility
Collateralised loan by central bank to bank at il
Increasing the money based by increasing reserves of commercial banks(also borrowings
Available at request = “borrowed reserves”
Standing deposit facility/Interest on access reserves
Interest paid on funds by Central bank in deposit facility or excess reserves
Id
Money market
Market for credit with initial maturity of less than one year
Least price fluctuations least risky investment
Examples of money market instruments
Repos
Commercial bills: negotiable unsecured debt securities issued by firm or bank
Treasury bills:Negotiable zero-coupon debt securities issued by government
Eurocurrency:Foreign currency deposits at bank
Capital market
Bond market: market for instrument of initial maturity exceeding one year
Equity market:Market for ownership shares in corporations
Derivatives market
Market for security staff to ride their value from other underlying assets
Interbank deposits
Surplus banks can lend to cash short banks
Equity
Claim to partial ownership of corporation which entitles owners to share in profits. typically distributed as periodic payment
Securitisation
Process of transforming illiquid financial assets issued by banks into marketable securities
Depository institutions
Commercial banks building societies
Contractual saving institutions
Insurance companies and pension funds
Acquire funds at periodic intervals on contractual basis
Investment intermediaries
Mutual funds : Pool resources of many small investors. Buy and hold diversified portfolio of securities
hedge funds: Acquire funds from large investor. Sell borrowed assets
Forward contract
Customised agreement by two parties to buy or sell assets at the agreed price at specific future date
Forward transactions reduce uncertainty by fixing future price
Future contract
Standardised negotiable( tradable )forward contract. Future price reflects expected price of underlying asset at expiration date of future contract.
Future prices capture market expectations of underlying asset price
Swap
Contracts that obligate to parties to swap one set of payments for another at the agreed rate during a specific period of time
Bank capital
The amount the bank could lose on its assets before it becomes insolvent(Unable to pay off its liabilities inc deposits by selling its assets
Moral hazard
The possibility that you will take less care to prevent an accident if you are insured against it.
Domestic bank supervision and balance sheet restrictions are necessary to limit the moral hazard resulting from deposit insurance and access to lender of last resort
Otherwise thanks would make excessively risky loans and inadequate provision for the future failure
