Monetary policy tools

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Monetary policy tools

  1. 1. Monetary Policy Tools (Federal Reserve Bank of NY)
  2. 2. Instruments of monetary policy: <ul><li>Open market operations: </li></ul><ul><li>interest rates </li></ul><ul><li>monetary base </li></ul><ul><li>Reserve requirements </li></ul><ul><li>Discount window lending </li></ul>
  3. 3. 1. Open market operations <ul><li>The most direct and frequently used way of changing the money supply is by raising or lowering the monetary base through open-market operations </li></ul><ul><li>Government securities </li></ul><ul><li>Debt warrants </li></ul><ul><li>(also called “ IOUs ” = “ I owe you ”) </li></ul>
  4. 4. Federal reserve wants to decrease monetary base Selling government securities FED debits commercial banks Banks debit its clients’ accounts Federal funds rate goes up Interest rates rises Slowing the economy and curbing inflation
  5. 5. The aim – to increase monetary base <ul><li>A boost in economy </li></ul>Buying government securities FED credits commercial banks Banks credit its clients’ accounts Federal funds rate goes down Interest rates also goes down
  6. 6. 2. Reserve requirements (RR) <ul><li>– percentages of certain types of deposits that banks must keep on hand in their own vaults or on deposit at a Federal Reserve Bank </li></ul><ul><li>RR raised banks reduce lending </li></ul><ul><li>RR lowered banks increase lending </li></ul>
  7. 7. 3. Discount window lending <ul><li>– lending reserves to banks so they can meet depositors’ demands or reserve requirements </li></ul>Interest rate Discount rate
  8. 8. 2 types of monetary policy <ul><li>The aim - to check inflation. </li></ul>The FED raises discount rate Economic activity slowed
  9. 9. 2 types of monetary policy <ul><li>2. FED wants to pep economic growth </li></ul>Economic activity stimulated Discount rate lowers
  10. 10. Thank you for your attention!

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