Tools of Monetary Policy w10

Flashcards covering the tools of monetary policy, including the market for reserves, federal funds rate, open market operations, discount policy, reserve requirements, and unconventional policies.

Federal Funds Rate

The interest rate at which banks lend funds to each other overnight.

Interest on Reserves (IOR)

The interest rate paid by the Federal Reserve on reserve balances held by banks.

Discount Rate

The interest rate at which commercial banks can borrow money directly from the Fed.

Open Market Operations

The buying and selling of government securities in the open market to influence the federal funds rate and the supply of money.

Reserve Requirement

The fraction of a bank's deposits that they are required to keep in their account at the Fed or as vault cash.

Dynamic Open Market Operations

Open market operations intended to change the level of reserves and the monetary base.

Defensive Open Market Operations

Open market operations intended to offset temporary fluctuations in reserves.

Primary Dealers

Government securities dealers who work with the Fed to implement its open market operations.

TRAPS (Trading Room Automated Processing System)

The Federal Reserve's system for processing and tracking open market transactions.

Repurchase Agreements

Short-term sales of government securities with an agreement to repurchase them at a slightly higher price.

Matched Sale-Purchase Agreements

The Fed sells securities and the buyer agrees to sell them back to the Fed in the near future.

Discount Window

A lending facility that allows banks to borrow money from the Fed.

Primary Credit

A standing lending facility in which healthy banks can borrow all they want at their discount rate.

Secondary Credit

Loans to banks that are not eligible for primary credit.

Seasonal Credit

Loans to smaller banks in areas of the country that have seasonal fluctuations deposits.

Lender of Last Resort

The central bank's role in providing liquidity to financial institutions during a crisis.

Moral Hazard

The risk that insurance against a certain event increases the likelihood of the event occurring.

Liquidity Provision

The Federal Reserve implemented unprecedented increases in its lending facilities to provide liquidity to the financial markets

Quantitative Easing

Large-scale asset purchases to lower interest rates for particular types of credit.

Credit Easing

The Federal Reserve providing liquidity to different parts of the financial system.

Forward Guidance

Committing to the future policy action of keeping the federal funds rate at zero for an extended period.

Main Refinancing Operations

Weekly reverse transactions

Marginal Lending Facility

Lending to banks

Deposit Facility

Lending to banks

Advantages of the OMO

better control of short-term interest rates, and flexibility in policy implementation. easily reveresed and quick implementation.

disadvantages of discount rate

can lead to increased inflation if used excessively and may discourage banks from seeking alternative funding sources.