W8P3 - Notebooklm Flashcards
What is monetary policy?
Essentially the policy of the central bank.
In most developed countries, is the central bank independent of the government?
Yes, for example in the UK, US, and the Eurozone.
What are the instruments of monetary policy
Variables that are directly under the control of the central bank, such as reserve requirements, refinancing rates, and the monetary base (M0).
What are the objectives of monetary policy?
The things that the central bank ultimately wants to affect, such as inflation, the level of output or output growth, and the exchange rate.
What are the targets of monetary policy?
Variables typically somewhere between the instrument and the objective, easier to control than objectives. Examples include the growth rate in M1 or M2 and long-term interest rates.
What is inflation targeting?
A situation where a central bank essentially targets a particular inflation rate, and the objective and the target become the same. For example, the UK targets 2% of the CPI.
Explain monetary targeting.
Setting a certain amount of money supply as the target and then accepting whatever interest rate occurs in the market depending on money demand. In this case, interest rates are endogenous.
Explain interest rate targeting.
Setting a particular interest rate as the target, and then increasing or decreasing the money supply to maintain that interest rate. In this case, the money supply is endogenous.
Can a central bank control both the money supply and the interest rate at the same time?
No.
Who influences the money supply in the economy?
The central bank, and also the behaviour of commercial banks.
What is the monetary base (M0)?
Currency plus reserves. It is directly controlled by the central bank.
How do commercial banks affect the money supply?
By the amount of deposits and loans they are giving out. Giving out loans creates deposits, which affects broader monetary aggregates.
What is the money multiplier?
The ratio between a broader monetary aggregate (e.g., M1) and the monetary base (M0).
What does the money multiplier depend on?
The reserve ratio (RR) and the cash ratio (CC). The reserve ratio is the fraction of deposits banks hold as reserves, and the cash ratio is how much cash or currency households want to hold as a fraction of M1.
How do commercial banks create money?
Through deposit creation. When a bank gives out a loan, the loan becomes a deposit, thereby increasing the money supply.
Besides issuing currency and reserves, what are other responsibilities of the central bank?
Research and forecasting, supervising the banking system, and acting as the bank for the banks (facilitating settlements).
What forms part of M0 according to the balance sheets?
Reserves held by commercial banks and banknotes held by households and the government, which are all liabilities of the central bank.
Is M0 a large or small fraction of the overall money supply (e.g., M1)?
A very small fraction.
Assuming a stable money multiplier, what does the demand for central bank money (M0) depend on?
The same factors that affect the overall demand for money, such as income, interest rates, and transaction costs
What is the money market (sometimes called the open market) important for?
It essentially sets the interest rate for the economy, affecting commercial interest rates as commercial banks borrow at this rate.
How can the central bank increase the monetary base?
By buying government bonds or commercial bonds and issuing new reserves.
What is the deposit facility rate (e.g., at the ECB)?
The interest rate the central bank gives to commercial banks when they deposit money with the central bank. Sometimes this rate can be negative to disincentivize holding reserves.
What is the marginal lending facility rate (e.g., at the ECB)?
The interest rate at which commercial banks can borrow from the central bank, typically requiring collateral like safe government bonds.
What are examples of key policy rates in the US and UK?
In the US, the federal funds target rate (or upper limit after 2008), and in the UK, the UK bank rate or base rate.
What trend has been observed in the policy rates of the UK and US since the 1990s?
Increasing synchronization.
