Chapter 15 Monetary Policy
Test Review of Chapter 15
may help with exams.
V. Effectiveness of Monetary Policy
VI. Modern Monetary Policy
VII. QE2 Keeps Money Loose Readings
VIII. Review Videos
Recent Thoughts of
I. The Demand for Money
Average ratio to GDP of unsecured and
Ratio of total mortgages to total value
Source: Jordà, Schularick, and Taylor (2016).
III. Types of
A. Quantitative affect the money supply.
1. Required Reserve Ratio
a. Lowering the reserve ratio creates excess reserves which banks may loan
as newly created money. This is expansionary.
b. Raising the reserve ratio eliminates excess reserve so banks can not renew
loans removing money and causing a contraction.
2. Open-market operations
a. Buying and selling of U.S. government bonds by the Federal Reserve from banks
or in the open market to change excess reserves thus affecting the supply of M1
and interest rates is the primary tool.
b. Buying bonds is expansionary.
1) When buying from banks, the Federal Reserve pays with reserves providing
excess reserves banks can loan as demand deposits.
2) When buying in the open market, increased demand from the Federal Reserve
pushes up prices sellers receive, lowering the effective interest sellers pay.
c. Selling bonds contracts the economy.
d. Review of Valuing bonds
1) 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.
a) A few years go by and you need money and one choice is to sell the bond.
b) 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
c) 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.
d) You can hold for twenty years and get par and get the money some where else.
2) 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.
3) This is called the interest rate risk for bonds. Other risks have to do with issuer
default and monetary inflation.
e. Federal Open Market Committee minutes make interesting reading.
f. It is the most powerful of the four tools.
g. Historical Note on lender of last resort type actions before there was a central
bank began in response to the Panic of 1837 (U.S. first great depression. source
1. "The Secretary of the Treasury, Salmon P. Chase, bought $13.5 million in
National 5-20 bonds, but this tepid government response did little
to calm the markets (Juglar 95)." Tepid response would be used to describe
FED actions during Great Recession.
2. "The New York Clearing House had two tools at its disposal for combating
banking panics and liquidity crises, in the form of loan certificates and
3. Discount rate
a. This is the rate charged by the Federal Reserve for loans to member banks.
b. It strongly affects the prime interest rate paid by a bank's best customers.
1) Lower the rate to expand economy as interest rates decrease.
2) Raise the rate to contract economy as interest rates increase.
3) Another important interest rate is the federal funds rate which is the rate at which
banks loan funds to each other.
4. Term Auction Facility
a. Initiated in 2007, it allows banks to add to their reserves at low rates.
b Done to increase bank liquidity which was low because of a loss in reserve
caused by a housing crisis.
5. 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
B. Qualitative controls affect the actions of market participants.
1. Moral suasion or jawboning
a. This social pressure by influential people to encourage specific people to act in the
b. It is used to influence public opinion and political attitudes.
c. An example is when the Chairman of Board of Governors makes his
Semiannual Report to Congress on the economy and monetary policy.
2. Margin Requirements, the down payment required on stocks which is now 50%,
is seldom changed.
3. Consumer Credit Controls credit cards work so well they are seldom used.
4. The Federal Funds Rate
a. Most controllable interest rate
b. Targeted by monetary policy
c. It is the overnight interest rate banks with excess fed reserve charge
each banks short of fed reserve to keep the system in balance.
d. By controlling reserves, the fed controls this rate.
e. This allows them some control over short-term rates.
f. For more information visit Federal funds rate - Wikipedia
g. Taylor rule affected by Fed's QE policies. 2/3/14
1. Taylor rule would have kept millions out of work (Minneapolis Fed) 1/17
2. A Taylor Rule for Public Debt
C. Monetary Policy Internet Game lets you be the FED chairperson.
D. Great Recession Brought New Tools
IV 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
D. The Trouble With Macroeconomics centers on the failures of monetary policy
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 Federal Reserve just buy Treasury securities directly from the U.S. Treasury?
4. Debt Monetization: Then And Now 4/14/18
Summary: Internet articles on difficulty of implementing monetary policy
V. Effectiveness of Monetary
1. Speedy and flexible
2. Somewhat isolated from political pressure
3. Hard money, restrictive Federal Policy, has
worked well recently.
1. Easy money has not worked well.
a. In the early 1900's, it didn't stop a recession.
b. Low profit expectations by business and fears
over possible employment loss by workers make
lower interest rates ineffective.
c. Interest rate cuts in 2001 were not able to stop
a recession as borrowing as indicated by velocity
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.
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.
1. Recent Events
a. The Great Recession had a monetary policy miscalculation
b. Greenspan's Ten-year Analyzed
c. Venetians, Volcker and Value-at-Risk: 8 centuries of bond market reversals
d. Rethinking Macroeconomic Policy Conference: Ben Bernanke, Monetary Policy
2 hr video 10/18/17
e. The 1970s Origins of Too Big to Fail 10/18/17 update FRB of Cleveland
a. Monetary Policy Basics
b. Monetary Policy Myths
c. On the importance of sound money
d. On-definitions of money critiques modern monetary policy
e. Monetary Policy will never be the same
f. The Zero Interest-rate Bound and Optimal Monetary Policy
g. When Is the Government Spending Multiplier Large?”
h. Why Treasury Secretaries Should Stick With the Strong Dollar Mantra 5/25/18 L. Summers
3. Learning tools from European Central Bank
a. Monetary Policy Game from the
b. Inflation Island another learning tool from ECB.
c. Disagreement and Monetary Policy 10/30/17
a. 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.
b. The Presidential Election Cycle Theory and the FED
c. 1994 FED Pre-emptive Inflation Strike Drew Controversy
d. Action to Stop Past Recessions, NYT 1p
e. The New Monetary Accord No One’s Talking About
Recent Currency Manipulations 4/25/16
VI. Modern Monetary Policy
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
1: 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
money creation, answers provided Monetary Policy practice questions, no answers provided.
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.
Easy does it
Easy does it
Treasury Using the FED Took on the Additional Debt
Competition For Funds Will Be Intense
Will Inflation Follow
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