Tools of Monetary Policy
- Created by: Nimnomrata.XOXO
- Created on: 09-11-20 19:24
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- Tools of Monetary Policy
- Repurchase agreements (REPO)
- Short term borrowing for dealers in government securities
- REPO
- dealer sells government securities to investors
- max 24 hours
- Maturity date may be the next day or many days later
- Overnight
- Acquired specified amount at an agreed interest rate
- Return securities on a specified future date
- Reserve Requirement
- Modify Interest rates
- Target numerical changes in the quantity of money
- proportions of deposits that banks must hold in cash
- Decrease = Expansionary
- Increases the monetary base therefore supply
- Increases funds the bank has to lend out
- Open Market Operations
- Feds buy and sell domestic assets with central banks
- produce target federal fund rates
- Influences short term interest rates and short term money supply
- Selling assets = Contraction
- Foreign Exchange Intervention
- Assets bought or sold are foreign currency and foreign assets
- Developing countries intervene to build reserves for themselves
- To stabilise the exchange rate
- Allows investors to be more comfortable with transactions using the currency of questions
- Done if currency out of sync with country economy
- Discount Window- discount rate policy
- Discount rate
- interest rate reserve bank gives to commercial
- Lowering = expansionary
- Central banks lend to member commercial banks on collateralised basis
- Commercial bank places eligible collateral with central bank
- Discount rate
- Direct Instruments
- Interest rate controls
- Bank-by-bank credit ceilings
- Direct Lending by central banks
- Repurchase agreements (REPO)
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