FMI Lec14 Central Banks and Monetary Policy

Who controls monetary policy

central bank

Central banks implement monetary policy by influencing ____

commercial banks

To affect credit and how much banks can lend, central banks can inject ____

reserves

3 monetary policy controls

1. interest rate

2. money supply

3. inflation

Federal reserve assets are _____ and ______

securities

loans to financial institutions [discount window]

When are discount windows used

in crisis

Before 2008, what kind of security were federal assets primarily composed of

T-bills

After 2008, what kind of security were federal assets primarily composed of

long-term treasuries and mortgages backed securities

The federal reserve’s liabilities are ___ and ____

currency in circulation

reserves (required and excess)

Open market operations

used in normal times pre-2008.

Purchase or sale of securities to influence reserves or discount loans to FIs

influencing the money supply

purchase by fed of bank securities will ____ the bank’s reserve by ______

increase

the same amount

Fed purchases of securities from the public will cause bank reserves to ____ because the bank gets the _____

increase

deposit

3 rates that influence the supply and demand of reserves

1. discount window rate

2. federal funds target rate

3. interest on excess reserves

Banks will not pay a federal fund rate higher than the _____

discount window rate

Banks will not lend reserves at a rate lower than the ____

interest rate of excess reserves

Supply and demand curve for reserves

Effect of an open-market purchase pre-2008

increase in supply

What characterized the pre-2008 reserve supply?

scarce supply

After 2008, reserves _____

increased dramatically

Effect of open market purchase after 2008

fund rate does not change

Quantitative Easing

large-scale asset purchases when interest rates are 0

• decrease asset supply, raising prices

• lower long-term interest rates

What does fed do to influence fed funds rate after 2008, as open market operations don’t work?

1. raising interest on excess reserves 

2. increasing reserve requirements

3. reverse repos

Effect of increasing interest rates on excess reserves

Effect of increase reserve requirements