HFU ECO 103 - Chapter 16 Monetary Policy Tools (16 pages)

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Chapter 16 Monetary Policy Tools



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Chapter 16 Monetary Policy Tools

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Lecture Notes


Pages:
16
School:
Holy Family University
Course:
Eco 103 - Basic Economics

Unformatted text preview:

Chapter 16 Monetary Policy Tools 1 The Federal Funds Market and Reserves Central banks have three primary tools for influencing the money supply Discount loans Open market operations Reserve requirement Money supply 1 The Federal Funds Market and Reserves The reserve requirement works through the money multiplier constraining multiple deposit expansion the larger it becomes Central banks today rarely use it because most banks work around reserve requirements 1 The Federal Funds Market and Reserves Discount loans influence the monetary base MB C R Discount loans depend on banks or non bank borrowers where applicable first borrowing then repaying loans The central bank does not have precise control over MB 1 The Federal Funds Market and Reserves Open market operations influence the monetary base MB C R Open market operations OMO are generally preferred The central bank can easily expand or contract MB to a precise level Using OMO central banks can also reverse mistakes quickly 1 The Federal Funds Market and Reserves The Fed Funds Market banks that need reserves can borrow them from banks that hold reserves they don t need Fed Funds Market Overnight bank borrowing Lower rates Higher rates Directly from Fed More Fed scrutiny 1 The Federal Funds Market and Reserves If Fed Funds rate discount rate banks borrow in Fed Funds Market If Fed Funds rate discount rate Arbitrage Borrow at discount window Lend in Fed Funds Market The discount rate sets an upper limit to ff the actual Fed Funds rate because no bank would borrow reserves at a higher rate in the federal funds market than it could borrow directly from the Fed 2 Open Market Operations and the Discount Window Open market activity decisions Daily FRBNY researches The level of reserves The Fed Funds target The actual market Fed Funds rate Expectations regarding float Treasury activities Treasury market conditions primary dealers specialized firms and banks 2 Open Market Operations and the Discount Window Open market



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