Nonconventional Monetary Policy, Price Stabilty, and Inflation Targeting

What is Liquidity Provision?

Increases in the feds lending facilities to provide liquidity to financial markets.

What ways does the Fed implement liquidity provision?

Discount window expansion, term auction facility

How does the FED implement large scale asset purchases?

Govt sponsered entities purchase program- but back securities and Govt bonds

What is the result of large scale asset purchases?

Make people expect lower interest rates, causing interest rates to decrease for certain types of credit

What tools were used during the global financial crisis?

forward guidance- making people think interest rate will decrease and offering negative interest rates on bank deposits

What are the monetary tools of the ECB?

uncentralized open market operations, refinancing operations, lender of last resort, interest on reserves, and reserve requirements 

What is a nominal anchor?

A nominal variable, such as the inflation rate or the money supply that ties down the money supply, which ties down the price level to achieve price stability.

What is the problem with the nominal anchor?

Time inconsistency

What are the other goals of a central bank?

High employment and output stability, Stability in financial and foreign exchange markets, and economic growth

What goal has to be in the long run in order for the dual mandate to work?

Price stability

What is inflation targeting and what does it do?

A public announcement of a medium-level target inflation rate, which increases the central bank’s transparency  and accountability

What are the pros of inflation targeting?

Pros: Doesn’t rely on one variable, easily understood, reduces the potential of falling into the time inconsistency problem, and stresses accountability

What are the cons of inflation targeting?

Cons: Delayed signaling, too rigid, potential for increased output fluctuations, and causes low economic growth during deflation