Questions tagged [monetary-policy]

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency. Further goals of a monetary policy are usually to contribute to economic growth and stability, to low unemployment, and to predictable exchange rates with other currencies.

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What is the privilege of a primary dealer?

Primary dealers have a privileged position, so there is value in being registered as a primary dealer. - https://economics.stackexchange.com/a/13450/8387 I was previously under the assumption that ...
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Why aren't open market operations a zero sum transaction?

I know that when the Federal Reserve buys Treasury bonds it increases the money supply, but I don't understand the process behind it. The model that I have given below (which is my best understanding ...
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The Fed Lowered Interest Rates, Are they going to buy Bonds?

I originally asked this question on personal finance/money because I didn't know that this exchange site existed. link to same question at person finance/money. Someone on that site mentioned that it ...
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What is it about the money market safeguards that increase volatility?

In recent coverage of the Fed's repo operation, I was struck by this line: It also indicated Wall Street is struggling to absorb record sales of Treasury debt to fund a swelling U.S. budget ...
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The effect of Monetary Policy on Asset Price Inflation

My macroeconomics professor told the following: A decrease in interest rate causes that consumers rather spend their money on investments (stocks, houses) than put the money on the bank, and the ...
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How does monetary policy affect inequality?

My thought process here would be that since government bonds are usually held by the richer households, buying of these government bonds would inject a large amount of money only to the richest, thus ...
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Where does the current debate stand on passive vs active monetary policy?

The debate between active and passive monetary policy is mentioned in most macroeconomics textbooks. Where does the current debate stand? Has a consensus been reached among economists? Do economists ...
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26 views

The effect of financing of government debt on the yield curve

Is it reasonable to expect that the US govt's financing of the growing budget deficit and US debt by issuing long term treasury bonds will push long term interest rates higher in the future? Shouldn'...
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Why does equity have historically poor performance after rate cuts?

I am struggling to understand why equity markets seem to suffer shortly after fed rate cuts. Here is a rather telling chart: Question Assuming not some kind of spurious relationship, what's the ...
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How does the Fed choose its asset purchase rate in an ample reserves era?

The St. Louis Fed's article "A New Frontier: Monetary Policy with Ample Reserves" states that the Fed now uses the IOER and ON RRP rates to set the FFR, instead of open market operations, which are no ...
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which policy (fiscal or monetary) is better to stabilize the cycle?

I am currently studying for a test and the following sentence "In an open economy with high capital mobility, monetary policy is preferable to fiscal policy to stabilize the cycle", the "answer" is ...
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What is a monetary policy shock?

I am trying to understand some basic stuff about New Keynesian models and monetary policy. Despite that almost every single paper on monetary policy talks about monetary policy shocks, I still don’t ...
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Why the historically narrow asset class purchases from QE

Let's begin by mapping out some context by assuming the following goals of implementing QE: prevent dire systemic liquidity concerns reach inflation targets manage expectations in the private sector ...
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Currency board, why the fluctuation in local currency

I have very basic question about currency boards: Assume that a country floats a new local currency "N" with the currency board model. It uses USD as the reserve currency. To begin with 1 N = 1 USD. ...
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Would a perishable currency work in a financial crisis today?

I read about perishable currencies in the following article Now my question is if there have been any studies on this and if this may work in modern financial markets?
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What is the optimal fiscal transfer rate between regions in a currency union?

I'm aware of the theory of optimal currency areas, and that both the Euro and the US dollar* are technically not optimal. This would tend to cause their optimal monetary policy to diverge over time. ...
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Exchange rate target zone 45 degree line in the free float case - Krugman Target Zones

As far as i understand in the Krugman target zone model the following equation describes the behaviour of the exchange rate within and outside a target zone $s_t = f_t + \alpha E_t(ds_t/dt)$. But if ...
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Characteristics of monetary sovereignty

I would like to explore how much of a consensus there is regarding the term "monetary sovereignty" and how precise we can articulate it. The broad concept being: The power of the state to exercise ...
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Different explanation for economic growth, depending on the length of the period considered

I'm being introduced to macroeconomics, and a colleague asked why do we say that in the short term the productivity of a country is determined by the "demand side" (IS/LM model) while in the long run ...
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Monetary Policy under commitment. How to solve the optimization problem?

Under commitment the CB might follow this problem as Monetary Policy strategy: $$ \min_{\pi_t,x_t}=E_0\sum^\infty_{t=0}\beta^t \left(\frac{1}{2} ( \pi_t^2 + \alpha x_t^2 )\right) $$ $$ \text{s.t. }\...
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Who profits from monetary expansion?

Is my understanding correct: In history (ancient, medieval) money was directly created by governments, therefore any monetary expansion meant 100% net profit for government, which could be used to ...
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Real Income and a Fixed Money Supply

What would happen to nominal income and wages if the money supply were fixed (100% reserve banking). Would real wages increase, even though nominal wages would stay the same or even decrease?
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Monetary policy and potential output growth

Can monetary policy affect potential output growth? And if yes, how is this consistent with the neoclassical thesis's of money neutrality in the long run?
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Active Passive Monetary and Fiscal Policy

I'm trying to understand a little better the operational differences between active and passive monetary-fiscal policy. For instance, is it that one should see different Taylor Rule feedback ...
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Is money mostly created (out of nothing) by banks making loans?

In the Bank of England's Quarterly Bulletin, 2014 Q1, McLeay, Radia, & Thomas write a pair of articles titled: "Money in the modern economy: an introduction" and "Money creation in the modern ...
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Is it true that when the overall money supply decreases, that the demand for money decreases and the demand for bonds and securities both increase?

Is it true that when the overall money supply decreases, that the demand for money decreases and the demand for bonds and securities both increase? I understand that to increase the money supply, the ...
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Nominal vs real growth of monetary base

Can someone clarify the difference between nominal and real growth of monetary base? I believe it is the policy of some central banks to target for example 0% nominal growth in the monetary base. What ...
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How does the central bank fund open market operations?

This may seem like an extremely simple question, but I have been unable to find any satisfactory information on this. How, practically, does the central bank generate the funds to purchases ...
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Does the European Central Bank still conduct monetary policy under the assumption of NAIRU?

My question is about NAIRU (Non-Accelerating Inflation Rate of Unemployment) and its relevance with respect to the European Central Bank's monetary policy. I have read somewhere that Philips Curve ...
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Linearisation of the IS curve?

How to the IS curve linearised around the structural equilibrium?, what is the math behind it?
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Quantitative easing

Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the ...
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Can central bank interest rate hikes lead to a price gain in equities?

I ran an empirical analysis on recent interest rate changes of European central banks on Swiss equity prices and found statistically significant results. A 1 percentage point increase in interest ...
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Central bank loss function

$$ L_t = \gamma(\pi_t - \pi_t^\otimes)^2 + \hat{Y}_t^2 $$ Central banks loss function is given by the equation above. This loss is increasing and convex in the distance from the inflation target, i.e....
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Why is the measured year 2018 inflation rate low despite rounds of quantitative easing?

Is it correct to state year 2018 inflation rate of 2.2% is very low? Is it correct to state that even though the commodity prices have not increased, the increased money supply coming from the ...
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A question about a derivation in Gali's Monetary Policy book [closed]

In Chapter 3 of Gali's famous Monetary Policy book, he measures the effects of a monetary policy shock. The interest rate rule is: Then a shock $v_t > 0$ occurs. He proceeds to measure how this ...
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Why does a reduction in money demand lead to a rightward shift in the LM curve?

In my textbook, it says Y must rise to restore money market equilibrium as the justification.
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How do central banks earn profit?

I thought of Central banks as the regulators of financial markets. But surplus reserves of some Central banks surpass giant corporate companies. Please explain me how do they manage to make profit in ...
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Main assumptions when discussiong what effect that a Turkish recession will have on EU GDP

Assuming that the Turkish economy will hit recession level numbers next year, what underlying assumptions can economist use to explain the likely effect on European GDP on a 5 year horizon. So, ...
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Central Bank Balance Sheets and foreign bonds

I have a question relating to central bank's balance sheets, taken from Krugman and Obstfelds' "International Macroeconomics" textbook. They mention that when the central bank purchases foreign ...
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Question on Open Market Operations

I have a very basic question on the somewhat cryptic Open Market Operations. So, from what I understand, say the Fed wants to reduce interest rates (increase monetary base). It will firs buy a bond by ...
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Tax system is progressive or regressive

Let´s discuss a little! When the direct effect of a tax or transfer policy (compared to what would happen in the absence of the policy) is a reduction in inequality, it is called progressive policy. ...
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How does the money supply grow in the long term?

For inflation to happen at roughly 2%/yr and for people to trade the same (or higher) volumes of goods, people must be trading more money. For such a trend to exist in the long term, there must be ...
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How would a “one-way” fixed exchange rate backed by destroying foreign currency work?

Note: This question may seem really pointless, but it's actually in the context of a cryptocurrency idea I am developing, but I posed it this way as the question is not really about cryptocurrencies ...
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Why would a rise in the discount rate stop foreign gold drain and make banks fail?

I am reading "Capitalism and Freedom" by Milton Friedman. In Chapter 3, "The control of Money", Dr. Friedman explains how the Fed exacerbated the Great Depression of the 1930s. In particular: In ...
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What is the point of a constant (thus known) inflation rate?

I have read somewhere (attributed to Milton Friedman) that a good practice of monetary policy is to maintain a constant inflation rate (of 3% per annum, say). What is the point of that? If everyone ...
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Cons of printing more money but not injecting in the system directly

So I don't know if this might be the right place, if it isn't I'd appreciate if anyone can link me to the right place. Anyways here is the question. I've read up on what are the cons of printing more ...
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Why do many economists believe that money is neutral in the long run?

If a central bank carried out monetary policy that consisted of multiplying each person's wealth by a common factor, I would find it plausible that all prices would get multiplied by the same factor ...
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What would be the effect on the economy if the United States legalized counterfeiting?

If today the United States legalized counterfeiting, what would be the effect on the economy? The counterfeit must look authentic to be legal, thus requiring some skill.
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Roosevelt’s Price Fixing in The Great Depression

Why didn’t Roosevelt’s method of fixing prices on labour and produce help the depression? If everyone was receiving a wage that allowed them to afford produce, wouldn’t that create a new equilibrium ...