unconventional monetary policy Flashcards
duration of FFR
overnight
problem in 2008
Fed was looking for additional ways to stimulate economy with FFR already being set to zero
why not just set FFr to -5%
people pull out of bank and use cash
Fed is not willing to push short term rates below zero so they
1) quantiative easing
2) operation twsit
3) forward guidance
unconventional monetary policy purpose
other than fine-tuning the total amount of reserves held by depository institutions
three unconventional monetary policy
1)quantitative easing
2)operation twist
3)forward guidance
1)quantitative easing
2)operation twist
3)forward guidance
is part of what policy
monetary
quantitative easing
when fed buys trillion treasury bills nd bonds in financial markets
-buying large scale assets
operation twist
sterilized version of QE
-twisted yield curve (abandoned it since its not very successful)
forward guidance
communication about future monetary policy
when is forward guidance most relevant
if you want to buy stocks and stuff because fed gives us hints of what they are gonna do in the future
idea behind unconventional monetary policy
all three tools is to boost aggregate demand by stimulating asset prices (via lower long-term rates)
unconventinoal monetary policy yield curve pre 2008
historically the fed mainly focused ons hort term rates such as FFR
unconventinoal monetary policy yield curve post 2008
today it is mostly explcicitly seeks to infleunce long-term rates as well
how are stock prices and interest rates related
inversely
do you finance with QE with physical money
dont finance with phsyical money nevause it is too much to work with
credit easing
one of the main things the fed bought in 2008 was mortgage stuff b/c of housing crash
-in 2020 fed bought paper to help firms
before 2008 how was fed financed
by cash, then b/c of QE that changed
MEP “twist”
purchased long form treasuries then sold short form b/c preference to keep size below 3 trillion
-had to venture above 3 trillion like covid
-now fed wants to dec balance street size
how long was QE3
over 2-3 years
with QE upward pressure on price depressed
interest rate
what do ppl do with lower interest rate
ppl buy more and spend more money
with QE P inc and r dec does what
stimulates AD beyond short term rates
how does the fed finance large-scale asset purchases
by reserves (IOO)
-fed liability
in what sense does a rise in the feds balance sheet represent a monetary expansion
because when Fed creates reserves then might be tempted to call it an expansion
why arent reserves money
because they dont fulfi;l functions of money (MOE)
in hindsight why is it unsurprising that this monetary expansion was not inflationary
2008 deflation
in which two ways can the fed unwind its balance sheet
fed does not sell. to get rid of the debt instruments they wait it out. if fed started buying stocks it would impact balance sheet because they would have to sell and Fed does not like to sell so other people would want to sell too
what does fed not like to do
does not like to sell
how can it maintain the current size of its balance sheet
keep buying same amount
QE4 was
inflationary
operation twist: LT buy
P inc r dec
operation twist ST sell
P dec r inc
what happened in december 2015 when unemployment had declined to 5 percent
the fed eventually raised FFR above zero
under QE the fed creates massive amounts of
reserves to purchase various financal assets
what does fed do to maintain its current size
fed must purchase as much debt as is currently expriing. to reduce/grow its balance sheet it has to buy less/more than is currently expiring
