monetary base

Monetary Base (MB)

Also called 'high-powered money,' it includes currency in circulation and reserves held by banks.

Federal Reserve

The Fed controls the monetary base through open market purchases and open market sales.

Open Market Purchases

Buying bonds to increase reserves.

Open Market Sales

Selling bonds to decrease reserves.

Open Market Operations (OMO)

The Fed buys/sells government securities to adjust the monetary base.

Borrowed Reesrves

Loans provided to banks through the discount window.

Non-Borrowed Monetary Base (MBn)

When fed buys securities it increases the ____, leading to higher bank reserves and an increase in money supply

Required Reserve Ratio (rr)

dictates the fraction of deposits that banks must hold as reserves

Currency Holdings

When people prefer currency over deposits, it limits reserves available for banks to lend, reducing money supply.

Excess Reserves

Banks may hold more than the required amount, which decreases the money supply.

Money Supply Process

Fed to banks to depositors

Open Market Operations

Primary method of controlling money supply.

reduces the effective tax on deposits, helps improve implementation of monetary policy, fed needed to provide liquidity to particular parts of financial system

Importance of Paying Interest on Reserves

Discount Rate

Interest rate on loans from the Fed to banks.

Liquidity Provision

Expanding lending to banks to ensure financial institution liquidity.

Asset Purchases

Buying securities to increase the monetary base and lower long-term rates.

Credit Easing

Altering asset composition to stabilize specific credit markets.

Forward Guidance

Communicating future policy intentions to influence market expectations.

Lending to Banks (ecb)

Includes marginal lending facilities for overnight loans.

Reserve Requirements (ECB)

Eurozone banks must hold a portion of deposits as reserves, impacting money supply by adjusting available funds for lending.

Open market operation, discount rate, reserve requirements, interest on reserves

TOOLS OF monetary policy (FED)

liquidity provisions, asset purchase, credit easing, forward guidance

non conventional tools in monetary

open market operation, lending to banks, reserve requirements

monetary tools of ECB

Open market operation, lending to financial institutions

FEDS ABILITY to control monetary base

non borrowed monetary base, borrowed reserves, reserve requirements, currency holdings, excess reserves

factors that determine money supply

Federal fund rate

This rate is the interest rate for overnight loans between banks. The Fed manages this rate through supply and demand in the reserves market.