Monetary Policy Flashcards
Monetary policy definition
Control of the nations money supply and interest rates
The 3 roles of monetary policy
Regulate inflation
Influence AD
Smooth the business cycle
UK inflation rate target?
2%
The 2 tools of the central bank to affect money supply are…
repurchase agreements (REPO) and open market operations (OMO)
Repurchase agreements are…
when a commercial bank sells government bonds to the central bank with the agreement to repurchase these bonds after 2 weeks at a higher price
Repo loans are…
loans banks hold under a repurchase agreement
The Repo rate is…
the rate at which loans under the repurchase agreement are given out = the % increase in the price of government bonds
Explain how altering the Repo rate up/down affects MS
Repo rate up= increased cost of borrowing therefore MS decreases
Repo rate down= decreased cost of borrowing therefore MS increases
Open market operations are…
the purchase/sale of government bonds by the central bank to the market
How does OMO affect money supply?
It alters the amount of deposits and therefore excess reserves banks have available to them to loan
Why does the central bank use OMO to target the interst rate and not the quantity of money?
Changes in quantity of money can cause large fluctuatons in the IR
Discretionary policy vs. rules
Discretionary focuses on responding to each shock with an individual policy (this may be the most effective soloution for freak events but the policy itself may be a shock to the market)
Rules mean that a know long term strategu=ies is in place to regulate money supply ussually based off indicators (can resolve issues before they begin, increases confidence and doesn’t suffer time lag but is inflexible)
3 stages of the transmisson model
- Monetary policy change influences IR
- Interst rates influence AE (C+I+X-M)
- AE influences AD,GDP and PL
QE be?
Direct purchase of bonds from finnacial firms using generated money
Macro-prudential regulation
Putting regulatory controls on banks to ensure reponsible conduct
