Economics of financial markets Central Banks

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  • Central Banks
    • What is a CB?
      • not a bank in the common sense
      • CB is a government authority
      • performs monetary policy
      • mostly independent from government
    • CB monetary policy instruments
      • (Old way) monetary bank control
        • quota on banks for volume of lending
      • (New way)
        • Control short term interest rates
      • Targets of monetary policy
        • low inflation (indirect relationship between money, interest rates and inflation)
        • low un-employment
        • GDP growth
    • Paradigms
      • Old
        • CB is a monopolist. uses monopolist power to set interest rate
      • New
        • CB acts as market participant. in order to influence prices and quantities
    • CB actions
      • Lending via "Discount Window"
        • CB lends directly to banks and sets the price at a discounted rate
      • Open market operations
        • CB buys or sells any assets in the open market. "market based" intervention
      • repurchase agreements
        • CB supplies repos to stabilize interest rates
    • CB functions
      • Conducts monetary policy
      • banker to commercial banks
      • banker to government
      • supervisor to banking system
      • manager of national debt
      • manager of foreign exchange reserves
      • issuer of national currency


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