Chapter 15
Monetary Policy

I. The Demand for Money
II. Monetary Policy
III. Effectiveness

IV. Application
V. Implementing Monetary Policy
VI. Modern Monetary Policy 
VII. QE2 Keeps Money Loose Readings
The Fed's Unwritten Mandate: Liquidity at all Costs
Practice Quizzes
A concise
One-Page Chapter 15 Test Review


Political Economy Stuff

Lecture Notes

I. The Demand for Money is  Dm= D+ D
    A. The demand for money, Dm= Dt + D
D1 results because people hold money, often in a money
               market account, to use as a medium of exchange.
          Dresults because people accumulate money, often held
                in an investment account,to buy assets and other needs
          For more information visit Demand for Money - Wiki
      B. Affecting the non-investment components of aggregate demand
          C + I + G + XN
         1. Lower interest rates  increase C, G, and XN
             a. Consumption increases as credit purchases become cheaper.

             b. Refinancing existing debt at lower interest rates by individuals,
                 businesses,and governments frees funds for spending.

             c. Lower interest rates also decrease the international value of
                 the dollar as investors buy (demand) other currencies to earn
                 more interest. The lower dollar increases XN as U.S. goods are
                 less expensive and foreign goods more expensive.

         2. Higher interest rates have an opposite affect

         3. Currency Exchange Rates and Economic Activity
             a. Value of a currency determines price of import and export goods
             b. Increase in money supply cause inflation lowering the value of
                 currency making exports cheaper and imports more expensive.
             c. Exports increase as they are less expensive in real terms
                 and imports decrease as conversion to yen makes Toyota's
                 more expensive
      C. Readings
1. A  strong Dollar is Always Good Except When It  Isn't. 1/24/15
          2. U.S Government's Problem With a Strong High Valued Dollar 2/5/15
          3. A Brief History of U S Dollar Debasement 1/8/13


 .       Summary: Monetary Policy is the regulation of the money supply
                                 to affect interest rates which economic growth

See Bubbles Credit And Their Consequences

First Powell Tackles Coronavirus-19 2021

Powell Reverses Course, Tackles Inflation 6/22


II. Monetary Policy   

   A. Prelude: A History of US Banking

   B. Monetary policy is the regulation of the money supply to affect interest rates, economic activity, with the objective of 
     noninflationary full employment
         1. It is part of, but not the focal point of Keynesian economics.
         2.Affecting interest rates and to change investment thus  affecting economic activity is one goal of the Fed.
            a. Controlling reserve requirement may affect the money supply which may affect interest rates
                1. Reserve requirement is the amount of demand deposits that must be kept in cash with the FED or in the bank.
                2. Often expressed as a percent called the reserve ratio.
                3. Excess reserve can be loaned as demand deposits.
                4. Excess reserves determine the potential money supply (M1).   
Changes interest rates change investment causing a change in AD which changes economic activity.
1) Increasing the money supply may lower interest rates. increasing investment which increases AD which causes an increase in Real GDP.
              2) Decreasing  the money supply may increase interest rates lowering investment which increases AD which causes an increase in Real GDP.
           c. Dollar values on this page are representative of amounts prevalent during the late 1990's (billions of dollars)

C. Types of monetary policy
           1. Quantitative controls affect the money supply.
                a. Required Reserve Ratio
                    1. Lowering the reserve ratio creates excess reserves which banks may loan as newly created money. This is expansionary.
                    2. Raising the reserve ratio eliminates excess reserve so banks can not renew loans removing money and causing a contraction.
                b. Open-market operations
                    1. Buying and selling of U.S. government bonds by the Fed from banks or in the open market to change excess reserves affecting M1 supply
                        and interest rates is the primary tool.
                    2. Buying bonds is expansionary.
                       a) When buying from banks, the Federal Reserve pays with reserves providing excess reserves banks can loan as demand deposits.
                       b) When buying in the open market, increased demand from the Federal Reserve pushes up prices sellers receive, lowering the effective
                           interest sellers pay.
                    3. Selling bonds contracts the economy.
                    4. Review of 
Valuing bonds
                        a) Suppose you buy a twenty year, $10,000 bond paying 5% per year at face value of $10,000. Face value is called par value.
                            1) A few years go by and you need money and one choice is to sell the bond.
                            2) If interest rates on this type bond have gone down, people will be very anxious to buy, demand, will be high pushing price up
                               and your will receive more than $10,000.
                            3) If rate shave gone down, no one will give you $10,000, demand will be low, so if you need the money, you will sell for less, below par.
                            4) You can hold for twenty years and get par and get the money some where else.
                         b) Therefore, interest rates and bond values (prices) go in the opposite direction, if interest rates down, old bond price up because they are
                             at the old higher rate.
                         c) This is called the interest rate risk for bonds. Other risks have to do with issuer default and monetary inflation.
                     5. It is the most powerful of the four tools.
            c. Discount rate
                1. This is the rate charged by the Federal Reserve for loans to member banks.  
                2. It strongly affects the prime interest rate paid by a bank's best customers.
                   a) Lower the rate to expand economy as interest rates decrease.
                   b) Raise the rate to contract economy as interest rates increase.
                   c) Another important interest rate is the federal funds rate which is the rate at which banks loan funds to each other. 
              d. Term Auction Facility
                  1. Initiated in 2007, it allows banks to add to their reserves at low rates.
                   2. Done to increase bank liquidity which was low because of a loss in reserve caused by a housing crisis.
f. Federal reserve balance sheet. 

      2. Qualitative controls affect the actions of market participants.
             a. Moral suasion or jawboning  
                 1. This social pressure by influential people to encourage specific people
                      to act in the public interest.
                 2. It is used to influence public opinion and political attitudes.
                 3. An example is when the Chairman of Board of Governors makes his
Semiannual Report to Congress on the economy and monetary policy.
             b. Margin Requirements, the down payment required on stocks which is
                  now 50%, is seldom changed.
             c. Consumer Credit Controls credit cards work so well they are seldom used.
d. The Federal Funds Rate
1. Most controllable interest rate
                 2. Targeted by monetary policy
                 3. It is the overnight interest rate banks with excess fed reserve charge
                     each banks short of fed reserve to keep the system in balance.
                 4. By controlling reserves, the fed controls this rate.
                 5. This allows them some control over short-term rates.
                 6. For more information visit Federal funds rate - Wikipedia
                 7. Taylor rule affected by Fed's  QE policies. 2/3/14
Taylor rule would have kept millions out of work (Minneapolis Fed)
A Taylor Rule for Public Debt


III.. Effectiveness of Monetary Policy

     A. Strengths
        1. Speedy and flexible
        2. Somewhat isolated from political pressure
        3. Hard money, restrictive Federal Policy, has worked well recently,
            but the high unemployment opportunity is substantial

    B. Weaknesses
        1. Easy money has not worked well with substantial downturns.
            a. In the early 1900's, it didn't stop a recession. 
            b. In early 80's cost was very high unemployment.
            c. Low profit expectations by business and fears
               over possible employment loss by workers make
               lower interest rates ineffective.
           d. Interest rate cuts in 2001 were not able to stop
               a recession as borrowing as indicated by velocity slowed.

      2. Bank deregulation has made commercial banks a less
         important supplier of investment funds thus diminishing
         the effectiveness of monetary policy.
     3. Changes in money velocity may negate some effects
         of monetary policy.

     4. Fall in real interest rates increase demand for fixed assets

    E. Summary
 affect the money supply: with required reserve, open-market
          operations, discount rate, term auction facility
          Qualitative: affect financial participation with moral suasion, margin requirements,
          consumer credit controls

IV. Application

         B. Adjusting to The Great Recession
             a. How Fed Adjusted Tools to Combate Great Recession 1
             b. How Fed Adjusted Tools to Combate Great Recession 2

        C. Adjusting to the Covid Shutdown Give Money Away

    V. Implementing Monetary Policy

              A. Elements Of Monetary Policy Implementation Framework 1 of 4
           B. Counterparties And Collateral Requirements Of Implementing Monetary Policy 2 of 4
           C. How Do Central Bank Balance Sheets Change In Times Of Crisis Part 3 of 4
The Trouble With Macroeconomics centers on the failures of monetary policy
The Long-Forgotten “M”
           E. FED answers fiscal policy questions
   1. What is the money supply? Is it important?
              2. What are the Federal Reserve's objectives in conducting monetary policy?

3. Why doesn't the FED just buy Treasury securities directly from the U.S. Treasury?
    4. Debt Monetization: Then And Now 4/14/18
       5. American Capitalism after the Volcker Shock

       F. General Reading
         a. The Brave New World of Monetary Policy SF FED
                     policy change resulting from the Great Recession 6/6/12
            b. The Post Keynesian View-of Monetary Policy 12/10/15
                 c. Are The Effects Of Monetary Policy Asymmetric? Richman Fed 3/12/17



   C. Euro Monetary Policy Failed
    D. The Coming War Between Trump & The Fed 8 min video review/preview 4/14/17
Inflation Looming? Phillips Curve vs. Quantity Theory | Econbrowser 12/20
. Summary:
        Strengths: speedy, flexible, less political pressure, works well controlling inflation but with pain
        Weaknesses easy doesn't spur enough growth, velocity adjusts to counter reserve changes.
Recent Effectiveness



Hope FED Prints the Correct Amount

In the 1970's the World Began Competing With US.
America was Forced to Adjust.
Nixon took US off Gold.
 Companies/Unions Leaders Cooperated
 to Maximize wellbeing.




Quantitative Easing In Focus:
The U.S. Experience - Forbes









Debt Monetization History




Many think Euros slide will continue.








Readings and Other Stuff
Recent Events
The Great Recession had a monetary policy miscalculation
Greenspan's Ten-year Analyzed
Venetians, Volcker and Value-at-Risk: 8 centuries of bond market reversals
Rethinking Macroeconomic Policy Conference: Ben Bernanke, Monetary Policy video
The 1970s Origins of Too Big to Fail 10/18/17 update FRB of Cleveland
Monetary Policy Basics
Monetary Policy Myths
On the importance of sound money
On-definitions of money critiques modern monetary policy
Monetary Policy will never be the same
The Zero Interest-rate Bound and Optimal Monetary Policy
 When Is the Government Spending Multiplier Large?
Why Treasury Secretaries Should Stick With the Strong Dollar Mantra 5/25/18                  

Learning tools from European Central Bank     
Monetary Policy Game from the
Inflation Island
another learning tool from ECB.
Disagreement and  Monetary Policy 10/30/17
What Caused the Recession of 1937 
Global Economic Intersection 8/212/13
Editors note: After WWI much of Europe inflation cause severe
apprehension that existed today.  The U.S. is apprehensive concerning high
persistent unemployment because of  the Great Depression of 1930's.
The Presidential Election Cycle Theory and the FED
1994 FED Pre-emptive Inflation Strike Drew Controversy
Action to Stop Past Recessions, NYT 1p
The New Monetary Accord No One’s Talking About
Recent Currency Manipulations 4/25/16
Today’s Source of Money Creation


       VI. Modern Monetary Policy
Basics from Modern Monetary Theory
                 1. monetarily sovereign government is the monopoly supplier
                 2. government has an unlimited capacity to pay for the things
                 3. government has an unlimited ability to fund other sectors
                 4. insolvency and bankruptcy of this government is not possible

            B. Overview Modern Monetary Theory is an unconventional
A new frontier for monetary policy with ample reserves

Seven Deadly Innocent Frauds of Economic Policy - Warren Mosler pdf
1. Lecture from W. Moster 62 min video
2. Video Interview


Modern Monetary Theory Videos
Demystifying Modern Monetary Policy
What Modern Monetary Theory Tells Us About Econ Policy
Why the Elite are Living In an Economic Fantasy
Modern Money & Public Purpose
: The Historical Evolution of Money and Debt
2: Governments Are Not Households
3: The Eurozone
4. Real vs. Nominal Economy
The Other Side of the Story

MMT vs. Austrian School Debate

Minsky, Inequality, and the Monetary: Fiscal Policy Outlook

VII. QE2 Keeps Money Loose Readings
. What is Fed's QE2
          1. Intended or Unintended consequences?
          2. For more read
Good Losers from 5/7/11 Economist Magazine
. European Moneta Policy 3/31/11
  C. The Case for ending QE2 early 4/12/11
     D. USB- US Monetary Policy Normalizing Near after helping Japan. 4/11
     E. Buttonwood, Forty yeas on from 8/11 of Economist Magazine
     F. The fed is not printing money Seeking Alpha 3/19/13
     G. The fed isn't stupid the market is understanding monetary policy
     H. Bond Vigilantes try to control federal borrowing
     I.  Paul Krugman changed his mind on bond vigilantes 2012-12
     J. comments with video on Fed and QE2 6/17/13
     K. Why 2014 could be ugly a look at the-fed
     L. Keynesian myths-central planning and the triumph of the warfare state
     M.  Japan Reflation Update
     L. Dollar Joins Currency Wars by Nouriel Roubini 2015-05
    M. Understanding the "Exorbitant Privilege" of the U.S. Dollar
Bernanke: "People Would Be Stunned By The Extent To Which The Fed Is Privately Owned"

VIII.  Macro Video S from ACDC Leadership 6/19/13

Practice Quizzes amosweb practice test questions by specific topic
money creation, answers provided
Monetary Policy 
practice questions, no answers provided.

FED Becomes the World's Banker





In A1971 the Nixon Shock ended the partial Gold Standard for the United States.  The Vietnam War deficits had caused inflation and the dollar's loss in value  caused foreign governments to withdraw gold. Eventually high inflation resulted in OPEC and temporally high oil prices.


Data Analysis

Real Rates Been Negative Many Times.

ECB Responded More Slowly Than FED



Treasury Using the FED Took on the Additional Debt


Wall Street's Brightest Minds Reveal the Most Important Charts in the World

It Has Been a While




Competition For Funds Will Be Intense


Will Inflation Follow



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