Chapter 18 Econ
what are the 4 conventional monetary policy tools
1) target federal funds rate 2)discount rate 3)deposit rate 4)reserve requirement
the four conventional monetary policy tools, also known as monetary policy instruments are:
1) the target federal funds rate 2) the discount rate 3) the deposit rate 4) the reserve requirement
a 1% point increase in the inflation rate raises the target federal funds rate by
1.5% points
how many times did the FOMC lower its target rate from september 2007 to december 2008
10 times
The ECB provides reserves to the european banking system primarily through
collateralized loans in what are called refinancing operations
to be effective, forward guidance needs to be
credible
a good monetary policy instrument has 3 features
easily observable to everyone controllable and quickly changed tightly linked to the policymakers objectives
aims at lowering the long term interest rates that affect private spending
forward guidance
in which the central bank communicates its intentions regarding the future path of monetary policy
forward guidance
simplest unconventional approach a central bank can take is to provide
forward guidance
3 borad categories of unconventional policy approaches
forward guidance quantitative easing targeted asset purchases
3 categories of unconventional policy approaches
forward guidance quantitative easing targeted asset purchases
3 principal unconventional tools of the central bank are
forward guidance quantitative easing targeted asset purchases
the fed controls the _____ on these loans they give out, not the quantity of credit extended
interest rate
cost of borrowing for those of us who need resources and the reward for lending to those of us with savings
interest rates
these are the instruments that are not directly under their control but lie instead somewhere between their policymaking tools and their objectives
intermediate targets
the procedure that allows banks to have 16 days to figure out their deposit balances before they even need to start holding reserves
lagged-reserve accounting
when the central bank makes loans to banks when no one else will or can
lender of last resort
discount lending
lending by the federal reserve, usually to commercial banks
to stimulate economic activity, forward guidance aims at
lowering the long term interest rates that affect private spending
the reserves a bank must hold are also averaged over a 2 week period called the
maintenance period
at which transactions between banks take place
market federal funds rate
the overnight interest rate at which lending between banks takes place in the market
market federal funds rate
europeans equivalent of the feds target federal funds rate
minimum bid rate also known as target refinancing rate
the fed adjusts the supply of reserves, with the goal of keeping the market federal funds rate close to the target rate using
open market operations
refer to actual tools of policy
operating instruments
these are the instruments that the central bank controls directly
operating instruments
the european analog to the market federal funds rate
overnight cash rate
the overnight interest rate on interbank loans in Europe
overnight cash rate
designed to provide additional reserves at times when the open market staff's forecasts are off and so the day's reserve supply falls short of the banking system's demand
primary credit
extended on a very short-term basis, usually overnight, to institutions that the Fed's bank supervisors deem to be sound
primary credit
the term discount rate usually refers to
primary discount rate
the rate on primary credit loan
primary discount rate (set above the federal funds rate)
what 3 loans do the fed make
primary loan secondary loan seasonal loan
in which the central bank supplies aggregate reserves beyond the quantity needed to lower the policy rate
quantitative easing
occurs when the central bank expands the supply of aggregate reserves to the banking system beyond the level that would be needed to maintain its policy target rate
quantitative easing
collateralized loans in what are called
refinancing operations
4th tool in the monetary policy toolbox
reserve requirements
used primarily by small agricultural banks in the Midwest to help in managing the cyclical nature of farmers loans and deposits
seasonal credit
available to institutions that are not sufficiently sound to qualify for primary credit
secondary credit
provided to banks that are in trouble
secondary credit
set above the primary discount rate
secondary discount rate
contract reserves by
selling short term government securities
the interest rate on primary credit is set at a
spread above the federal funds target rate
supply of reserves adjusted through open market operations to meet expected demand at the target rate
target federal fund rate
FOMC primary policy instrument
target federal funds rate
changes interest rates throughout the economy
target federal funds rate
primary instrument of monetary policy
target federal funds rate
in which the central bank alters the mix of assets it holds on its balance sheet in order to change their relative prices in a way that stimulates economic activity
targeted asset purchases
says that the target federal funds rate should be set equal to the current level of inflation plus a 2% real interest rate plus a factor related to the deviations of inflation and output from their target or normal levels
taylor rule
simple formula that approximates what the FOMC does
taylor rule
tracks the actual behavior of the target federal funds rate and relates it to the real interest rate, inflation, and output
taylor rule
quantitative easing increases the size of
the central banks balance sheet
ECB's marginal lending facility
the facility through which the ECB provides overnight loans to banks
minimum bid rate
the minimum interest rate that banks can bid for reserves in the ECB's weekly refinancing operation
lending of last resort
the ultimate source of credit to banks during a panic and a role of the central bank
in setting the primary lending rate above the target federal funds rate, the fed is attempting
to stabilize the market interest rate on an overnight interbank lending
unpredictable and potentially disruptive
unconventional monetary policy
ECB's deposit facility
where euro-area banks with excess reserves can deposit them overnight and earn interest
the term for the fact that a nominal interest rate, including the monetary policy rate, cannot fall below zero
zero bound
banks can always hold cash paying
zero interest
the analog to the federal reserves primary credit facility
ECB's marginal lending facility
repurchase agreements
a short term collateralized loan in which a security is exchanged for cash, with the agreement that the parties will reverse the transaction on a specific future date, as soon as the next day
banks that request secondary credit from the Fed are banks that
cant borrow from anyone else
the federal funds rate target, the rate for discount window lending, and the deposit rate
conventional policy tools
the floor
deposit rate
sets a ceiling on the market federal funds rate
discount rate
communication regarding expected future policy target rates
forward guidance
target federal funds rate is determined in the
market, not the by fed
the bank is in trouble
secondary credit
the federal reserve has 4 conventional monetary policy tools
1) the target federal funds rate 2) the discount lending rate 3) the deposit rate 4)reserve requirements
there are two circumstances when additional policy tools can play a useful stabilization role
1) when lowering the target interest rate to zero is not sufficient to stimulate the economy 2)when an impaired financial system prevents conventional interest rate policy from supporting the economy
when inflation rises, the FOMC raises the target interest rate by _____ times the increase
1.5
the fed sets the primary lending rate at a spread
above the target federal funds rate
the ECB provides liquidity to the banking system primarily through
auctions called refinancing operations
the deposit rate is set at a spread
below the target federal funds rate
banks with excess reserves can deposit them at national central banks and receive interest at a spread
below the target refinancing rate
when marked the first time since the 30s that the Fed hit the zero bound on the nominal federal funds rate
between september 2007-december 2008, fed lowered its target for the federal funds rate 10 times
expand reserves by
buying short term government securities
what is necessary to ensure financial stability
central bank lending
to steady the financial system and the economy after the crisis, the fed utilized its three principle:
conventional policy tools
to steady the financial system, the Fed utilized the 3 principle:
conventional policy tools
set at a spread below the target funds rate
deposit rate
sets a floor on the market federal funds rate
deposit rate
sets a floor under the market federal funds rate
deposit rate
the rate that the fed pays on reserves held by banks at the central bank
deposit rate
the rate they pay on reserves banks hold at the central bank
deposit rate
lending by the federal reserve banks to commercial banks
discount lending
used to supply funds to banks, particularly during crises
discount lending rate
ceiling on market federal funds rate and means to provide liquidity to banks in times of crises
discount rate
rate they charge for discount loans to banks in need of funds
discount rate
set at a premium over the target federal funds rate
discount rate
the ceiling
discount rate
the fed allows the federal funds rate to fluctuate around its target in a channel or corridor defined by the
discount rate and the deposit rate
rate at which banks make overnight loans to each other
federal funds rate
primary tools for monetary policy during normal times
federal funds rate, discount rate, deposit rate
banks can hold either deposits at
federal reserve banks that earn interest or vault cash
the simplest unconventional approach is for the central bank to provide
forward guidance
this is when the central bank communicates intentions regarding the future path of monetary policy
forward guidance
when output rises above potential by 1%, the FOMC raises the target interest rate
half a percentage point
tend to restrict the growth of credit, making it harder for businesses and households to get financing and for individuals to find or keep jobs
higher interest rates
the 3 prices the central bank concentrates on are the:
interest rate at which banks borrow and lend reserves overnight interest rate at which banks can borrow reserves from the Fed interest rate that the Fed pays on reserves that banks hold at central bank
use of unconventional policy tools including:
massive purchases or risky assets and the communication of its intent to keep interest rates low for an extended period
the fed has four conventional monetary policy tools, also known as
monetary policy instruments
the federal reserve has 4 conventional monetary policy tools also known as
monetary policy instruments
banks will not led their reserves at a
negative nominal interest rate
banks will never choose to lend their reserves at a
negative nominal rate
the best tools are
observable, controllable, and tightly linked to objectives
vary the quantity of reserves through
open market operations
what are used to control the federal funds rate
open market operations
an increase in reserve demand is met by an
open market purchase
the european central banks primary objective is
price stability
overnight, post collateral
primary credit
the fed makes 3 types of loans
primary credit, secondary credit, and seasonal credit
the ceiling for the market rate on overnight interbank loans
primary lending rate
supplying aggregate reserves beyond the quantity needed to lower the policy rate to the target rate (usually zero)
quantitative easing
when the central bank supplies aggregate reserves beyond the quantity needed to lower the policy rate to zero
quantitative easing
set by the federal reserve board within a legally imposed range
reserve requirement
stabilizes the demand for reserves and not used to alter monetary policy
reserve requirement
what is not useful as an operational instrument
reserve requirement
used to stabilize the demand for reserves
reserve requirements
banks are required to hold:
reserves against certain deposits
bank is in an area where there is a lot of seasonal activity
seasonal credit
ECB allows banks to borrow from the marginal lending facility at an interest rate that is
set above the target refinancing rate
primary tools for monetary policymaking
short term interest rate
the tool to use to stabilize short term fluctuations in prices and outputs
short term interest rates
a bank is supposed to show its _____ to get a loan in a crisis
sound
the central bank is supposed to:
stabilize prices, output, the financial system, exchange rates, and interest rates
the fed forecasts the demand for reserves each day and then
supplies the amount needed to meet the demand at the target rate
the minimum bid rate on the main refinancing operations
target refinancing rate
the target interest rate controlled by the governing council
target refinancing rate
changing the mix of assets at the central bank to alter their relative prices
targeted asset purchases
when the central bank alters the mix of assets it holds on its balance sheet in order to change their relative prices in a way that stimulates economic activity
targeted asset purchases
simple equation that describes movements in the federal funds target rate
taylor rule
determines the floor for the market rate on overnight interbank loans
the deposit rate
target federal funds rate
the interest rate at which banks make overnight loans to each other
deposit rate
the interest rate that the Fed pays on reserves that banks hold in their accounts at the central bank and that puts a floor under the market federal funds rate
discount rate
the interest rate the Fed charges on the loans it makes to banks and that forms a ceiling for the market federal funds rate
reserve requirement
the level of balances a bank is required to hold either as vault cash or on deposit or at a federal reserve bank
can help a central bank exit smoothly from unconventional monetary policy
the payment of interest on reserves
by controlling the quantity of loans it makes, a central bank can control
the size of reserves, the size of the monetary base, and interest rates
can supplement conventional policy when a zero policy rate is not low enough to stabilize the economy or when an impaired financial system prevents conventional interest rate policy from working
unconventional monetary policy
policy mechanisms that are usually reserved for extraordinary episodes when conventional interest rate policy is insufficient for economic stabilization
unconventional policy tools
the nominal policy rate faces a ________ which says it will never fall below zero
zero bound
