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Monetary policy presentation.ppt
 

Monetary policy presentation.ppt

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  • Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing
  • Monetary policy’s ultimate objective : Economic growth; full employment; minimum inflation
  • Monetary policy’s ultimate objective : Economic growth; full employment; minimum inflation
  • Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. (‘easy monetary policy’)Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values. (‘tight monetary policy)
  • Example of expansionary policy application
  • Example of contractionary policy application
  • Or you can say the sum of bank deposits at the central bank plus vault cash
  • Bank reserve ratios are central bank regulations that set the minimum reserves that a commercial bank must hold as a percentage of its deposits and notes.For example, let’s say that the amount of money in your bank’s savings and current account is $10,000.If the CB sets the ratio at 10%, then your bank must hold at least $1,000 in reserves.Maintaining a $1,000 reserve means that your bank can generate income by lending up to $9,000.
  • Raising the Reserve Ratio --Banks must hold more reserves --Banks decrease lending --Money supply decreasesRaising reserve requirements forces banks to withhold a larger portion of their funds, thereby reducing the money supply, while lowering requirements works the opposite way to increase the money supply.
  • Lowering the Reserve Ratio--- Banks may hold less reserves--- Banks increase lending--- Money supply increases
  • A decrease in the discount rate makes it cheaper for commercial banks to borrow money, which results in an increase in the supply of money in the economy. Conversely, a raised discount rate will make it more expensive for the banks to borrow, and would thereby decrease the money supply.
  • Indonesia's Central bank discount rate equals to 6.37 % with a global rank of 57 compared to United States' Central bank discount rate which equals to 0.50 % with a global rank of 140.
  • Main objective of nominal anchor: to achieve price stability
  • When you have a time-inconsistency problem it means that you find yourself unable to consistently follow a good plan over time.For example, let’s say my new years’ resolution is to restrict my spending, by stop buying things I don’t really need.However, on January 2nd, Marks & Spencer held a massive sale, all things 80% off. At that time, it seemed like a good bargain, so it was a sound decision to buy as many clothes as I can, since the sale was only for a limited time. However, I don’t really need all those tank-tops and blazers. In the long run, they probably fill up my wardrobe, and I have to pay extra for the laundry. Not to mention my new years’ resolution failed completely.This happens with monetary policy makers too, because in the short run, expansionary policy would produce higher growth and employment. However, one thing we all should know, is that businesses adjust their wage and price expectations upward to reflect the expansionary policy.

Monetary policy presentation.ppt Monetary policy presentation.ppt Presentation Transcript

  • What is monetary policy? “…the process by which the monetary authority of a country controls the supply of money.”
  • What for?
  • What for?
  • Expansionary Contractionary
  • Problem • unemployment and deflation Remedy • induce an expansion in the supply of money, and therefore spending, by reducing the interest rate Means • Buy bonds in the open market
  • Problem • inflation Remedy • induce a contraction in the supply of money, and therefore spending, by increasing the interest rate Means • Sell bonds in the open market
  • Open Market Operations The buying and selling of government securities by the Reserve Bank on secondary markets
  • OMOs aim to… manipulate the short term interest rate manipulate the supply of base money control the total money supply
  • How OMOs Work: Buying securities from commercial bank • Gives up securities Bank Fed/ CB • Pays the bank • Increases reserves Bank
  • How OMOs Work: Buying securities from public • Gives up securities Public Fed/ CB • Pays • Deposits in bank Public Bank • Increases reserves
  • How OMOs Work: Selling securities to commercial bank • Gives up securities Fed/CB Bank • Pays • Decreases reserves Bank
  • How OMOs Work: Selling securities to public • Gives up securities Fed/CB Public • Pays by check from bank • Decreases reserves Bank
  • Understanding The Reserve Requirements Required reserves A certain fraction of deposits that a depository institution is required to reserve.
  • Set by the central bank Affects the size of loan that the bank can offer
  • Required Reserve and Monetary Policy
  • Required Reserve and Monetary Policy
  • Other tool: Discount Rate The interest rate charged by Federal Reserve Banks to depository institutions on short-term loans.
  • Goals of Monetary Policy Price stability
  • Nominal Anchor in Price Stability Goal Nominal anchor uses a certain nominal variable which ties down the price level. For example: maintaining an inflation rate between 2% - 4 % might be an anchor.
  • Time-Inconsistency Problem This problem arises because policy makers are always tempted to pursue monetary policy that is more expansionary because it would boost economic output.
  • “…does not mean that unemployment is at zero” High Employment
  • “…ensuring that resources are not idle” Economic Growth
  • “…crises can interfere with the main function” Stability of Financial Markets
  • “…fluctuations can create uncertainty in economy” Interest-Rate Stability
  • “…stability makes it easier for businesses to plan ahead” Stability in Foreign Exchange Market