Monetary Policy Flashcards
monetary policy
actions by the RBA to affect monetary and financial conditions in the economy by affecting the price of money and credit
cash rate –> interest rates –> price of money/credit
objectives
stability of currency
maintaining full employment
economic prosperity ands welfare of the people of Australia
financial market
act as in intermediator between savers and investors (borrowers and lenders of funds)
financial institutions
banks building society's finace companies merchant banks credit unions
loan market
firms borrow money to buy capital equipment
households barrow to buy houses and cars
banks, credit unions, finace companies
bonds market
firms are government sells bonds to raise finace
fixed interest security
main method of finace a budget deficit
share market
firms can obtain finace by issuing new shares on the stock market
functions of money
means of exchange
unit of measurement
store of value
cash rate
the overnight lending rate between banks
the cost of lending financial assets between the central bank and other banks or among themselves
interest rates
the costs of lending/borrowing between the bank and another entity (personal or business)
represent the price of credit and the reward of saving
nominal interest rates
rates that have not been adjusted for the expected inflation rate
real interest rates
the nominal rate - expected inflation rate
*more important when it comes to determining economic decisions involving borrowing and saving
primary market operations
availability of credit (money supply)
price of credit (interest rates)
components affected by a change in interest rates
saving and investment decisions
the cash flow of households and firms
wealth and assets prices
the exchange rate
saving or investment decisions
IR–> price of borrowing/incentive to save
–> economic activity
cash flow
IR –> amount of disposable income –> economic activity
wealth and assets
IR –> attractiveness of shares VS. bonds
exchange rates
IR –> attractiveness of the economy to invest (return rate) –> supply/demand of AUD
contractiony stance
upwards movement of CR and restricting money supply
aimed at restricting the level of disposable income
expansionary stance
downward movement of CR and expanding money supply
aimed at expanding the level of disposable income
neutral stance
the policy rate required to bring about full employment and stable inflation
nominal cash rate adjusted for inflation
strengths
targets C, (X - M), and I fixability and speed (debated daily, limited recognition, decision and implementation lag) independent authority effective in booms interest rates effected (capital inflow) demand of currency changes
weaknesses
effect lag (long time as it is indirectly moving through the economy) fairly ineffective in a downswing/trough/recession blunt policy instrument (one size fits all)
why wont the monetary policy work
2011 - …
existing debt (post GFC) subdued wages and earnings high AUD baby boomers retiring tighter financial controls low CR = low confidence
unconventional monetary policy definition
occurs when tools other than changing a policy interest rate are used
examples of unconventional monetary policy
quantitative easing (QE)
term funding facility (TFF)
forward guidance
negative interest rates
negative interest rates
being charged by you bank to deposit money - extreme disincentive to save
forward guidance
communication of the stance of MP
manages and sets expectations
quantitative easing
asset purchasing
the outright purchasing of assets by the central bank from the private sector with the central bank paying for these assets by creating ‘central bank reserves’
“printing money” increasing the supply of money making it easier to lend money and reduces the incentive to save
increased D for bonds decrease yield (because price of the bond increases)
Term funding facility
3-year funding for approved deposit taking institutions at 0.25%
increases the confidence to lend money
reduced the costs for businesses and low income households
‘subsides the cost of borrowing’
