Chapter 18: Monetary Policy

Federal BS Assets Securities(US Treasury Bonds) Foreign Exchange Reserves Liabilities Reserves(Payable) Banking System Assets o Reserves(Receivable) o Securities o ( Foreign Bond o Original Currency o From a Foreign Country o Discount Loans Withdrawals DRB Assets o Liabilities o Monetary Base: High-powered Money Currency + Bank Reserves

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M1=Cash + Demand Deposits M1= M1 + MMDA + Time Deposits + CD 100,000 M3= M2 + CD>100,000

Expansion Multiplier A. Assets o Reserves Securities + o Securities B. Assets

 C.

o Reserves 0 o Securities o Loans + Liabilities o Checkable Deposits

Assets o Reserves 0 o Securities

o Loans + Liabilities o Checkable deposits 0 o Quantity Theory and the Velocity of Money Velocity The number of times a dollar is used Quantity of Money * Velocity=Nominal GDP Nominal GDP= Price Level*Real Output Nominal= Current Price d/dxM + d/dxV= d/dxP + d/dx Y Money Growth+ Velocity Growth=Inflation + Real Growth Double M => Double Price Inflation is a monetary phenomenon The Demand fo Money Quantity of Money Nominal On their nominal income Cost of holding money The availability of substitues Interest Rates People reduce their checking account balance Shift funds into and out of higher yield

3/17/2014 6:05:00 AM Multiplicador monetario Modelo donde no existe demanda del publico por cash Reservas Requeridas o R*deposito a la demanda = RR = o R* /\ D o Total de Reservas = Requeridas + Excesivas = R = RR+RE

Chapter 18: Monetary Policy

Using interest rates to stabilize the domestic economy Inflation rate 2% ..20140326 FED controls the supply of money, completely.

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Long Term Interest Rates: Average of Short Term interest rates Market Grop Stabilize the funds rate Use both temporary and permanent open market operations o Temporary are every day o Permanent about once a week Temporary Open Market Operations Use repurchase agreements Deciding the level if reserves is comlicated and uses information from: o Treasury about their Balance o Reserve Discount Lending o Not an important part of day-to-day monetary policy Primarily to avert crises: Central Bank is the lender of last resort. European Central Banks *Overnight Cash Rate = ECB equivalent to Federal Funds Rate Main refinancing rate: o Rate on a weekly auction of 2 weeks maturity from central Banks to the comercial Banks. Marginal Lending Facility(Discount Window) o ECB makes loans at a target OCR* o +100 bps Deposit Facility o ECB pays interest at target OCR*-100 bps (

20140328 Operating Instruments

o Interest rates, Monetary Base Intermediate target o Monetary Agrregates (M1,M2 Objectives o Low inflation(2% goal**), Growth, stable interest rates o o Taylor Rules (tracks behaiviour) o Taget Fed Funds rate = 2.5 + Current inflation+.5(inflation gap) + .5(Output gap)*** o *** All resources are working (Workforce,Capital,Ventures) unemployment is posible When inflation(18-30) Fisher Effect****

Exchange Rate Policy and the Central Bank17/03/2014 6:05:00

Capital Flows Purchasing Power Parity One unit of domestics currency will buy the same basket anywhere in the world %/\ Exchange rate = Inflation Differential Central Bank must choose between controling inflation or fixing the Exchange rate. Interest Rate Parity If the Exchange rate is fixed interest rate must be the same. If the interest rates differ, funds will move to equate them.

Higher inflation-Lesser value of Currency

20140407 The mechanics of Exchange Rate Intervention increases reserves causing interest to fall. Increases investors desir to move funds out of the country Affects value of the dollar by changing domestic interest rates FOREX intervention affects the value of a countrys currency by changing interest rates Open market desk sterilizes the intervention Fixed Rates: Benefits Eliminates Exchange rate risk.international trading easiers Reduces risks of investing abroads Tie policymakerss hands Cost Eliminates stabilization effects of Exchange Requires a high level of foreign Exchange reserves

***If goverment need to incresase the money supply(goldstandard) doesnt the money have the Correlation by language and