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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Possibility of recession with high interest rates

From this plot, it seems that every time there is a recession, the Federal Reserve Bank cuts interest rates. This is because money circulation slowing down will lead to a downward spiral and lower ...
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How do Fiscal and Monetary policy interact intuitively?

Suppose there is a recession, and the government aims to provide a fiscal stimulus. Assuming an independent CB, the government will issue treasury bills to borrow and finance the stimulus. Consider ...
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Why did Newton choose to devalue silve with respect to gold and (effectively) create the gold standard?

This is a question of economic history, specifically about one specific event that caused the British to adopt the gold standard. Reading about the gold standard one often encounters statements like ...
Alexandar Ruño's user avatar
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Why does price stickiness induce non-determinate interest rates in the NK model?

I am hoping for a simple intuition for why price stickiness induces indeterminacy of the interest rate, $i_t$, in the benchmark New Keynesian model. When prices are flexible, the natural rate is ...
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What were the biggest events in terms of Monetary Policy in May 1975?

Take a look at this plot, which is the daily American zero-coupon yield curve from 1975, as reconstructed by Liu and Wu (JFE, 2021): One can see a major change of shape in May, 1975. It seems that ...
Raul Guarini Riva's user avatar
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movements along and shifts of the AD curve

i dont understand how the reason that i've stated below causes a shift of the AD curve while the other causes a movement along when they're almost the same thing. how does contractionary monetary ...
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A question about Ihrig et al. (2015) and the Fed's policy implementation prior to 2008

Ihrig et al. (2015) review the implementation of monetary policy in the US prior to and after the Financial Crisis of 2008-2009. In describing the Fed's approach prior to the crisis, based on open ...
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A Classical Monetary Model (Gali)

In the classical monetary model described by Gali (2008), in chapter 1, on page 28 it is written that: $$ \pi_t=-\frac{\sigma \psi_{y a}\left(1-\rho_a\right)}{\phi_\pi-\rho_a} a_t $$ The author states ...
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Repaying loan principal destroys deposits - but what about making interest payments?

It's pretty well understood (and documented) that when a bank loan principal is repaid, deposits are destroyed. What about the effect of interest payments? Intuitively, I would expect paying ...
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What is the difference between "The effects of Monetary Policy" and "The effects of Monetary Policy Shock"?

I know this may be a silly question. I always thought these were different but some people in the literature use them interchangeably and I was wondering are they different? If so, how are they ...
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"If the aggregate supply is linear, demand shocks cannot affect average unemployment", what does it mean?

Aggregate Supply: $\pi_t =\pi_{t-1} -\alpha(u_t -\bar{u})+e_t^S$ Welfare: $W_t =-cu_t -f(\pi_t ), c>0, f''(\cdot)>0$ $\bar{u}$: natural unemployment rate $e_t^S$: supply shock In Romer's ...
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Taylor Rule Model Specification: Serial Correlation and Interest Rate Smoothing

I'm reading this paper by Abrams and Iossifov. The paper investigates electoral cycles influence on monetary policy by estimating a Taylor Rule reaction function using OLS. The authors describe the ...
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Source of Fed Speeches Portal

Does anyone know of a website that contains all the text speeches of all the FOMC members and regional Federal Reserve Bank Presidents going back to a few decades, for example the 1970s.
Cel's user avatar
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Monetary policy: could there by alternative outcomes?

Firstly, I understand the standard analysis of how a central bank attempts to modulate credit conditions in the economy (and therefore money supply) to dampen demand to prevent excess price level ...
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Does monetary policy render mathematical models for short-rates nearly useless?

Note: please do note that I am a tech person with no economics background. I've been studying short-rate models so much for interview purposes and finally took a step out of the weeds to think about ...
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Can you change monthly monetary shocks into quarterly ones?

There are now many series deriving monetary shocks at high frequency, e.g., Jarocinski-Karadi (AEJ:M, 2020), Bauer-Swanson (NBER MA, 2023). These typically come at a monthly frequency. However my ...
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Does the ECB issue staff projections for its own interest rates, as the Fed does?

I can see that it has a 'projections' segment here: ECB staff forecast But it seems to take market rates as reference.
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Instead of quantitative easing why wouldn’t Stimulus at Checkout (SAC) work?

Instead of quantitative easing and interest rate reductions why wouldn’t Stimulus at Checkout (SAC) work? What is SAC? When the Fed needs to stimulate the economy, using Point of Sale technology, SAC ...
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how does Fed's discount rate affect risk-free rate

So the Fed's discount rate is the rate charged on commercial banks for borrowing funds from it. The question is how does the Discount rate affect the overall level of interest rates in the economy ...
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Why was the USD rangebound between 1987 and 1995 from an economic standpoint?

I'm trying to understand what caused this long period of range boundedness for the USD index from 1987-1995 from an economic standpoint. From my understanding. In 1985 the USD had reached it's ...
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How can good outcomes, and not just trade-offs, be achieved through economic policy?

I realise this is a very broad question, and my economic knowledge amounts to 1 year of high school, but it seems as though every economic policy causes trade-offs, and none actually solve issues. As ...
Iron filings's user avatar
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Taylor rule and central bank preferences

When the central bank has output stability preferences, it is true that Taylor's rule (TR) is suboptimal compared to optimal monetary policy (MPR) if an inflationary shock occurs. But when the central ...
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If interest rate policy were to disappear tomorrow, how would we/could we manage inflation?

Inflation has obviously become a big issue over the last couple of years again, and I've read people complaining that the inflation comes from increased prices of energy imports, (namely oil and gas), ...
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What is the difference between monetary policy and monetary policy shock

Sorry for a silly question but I must know the answer to the question. I am asking this because it seems like some people do not differentiate between monetary policy and monetary policy shock. For ...
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What's exactly the T/Y value in the Quantity Theory of money simplified equation: MV=PT or MV=PY?

I understood the basic fundamental principle of the theory, that all things being equal, a change in the money supply affects price level. Yet, now I am trying to understand this statement ‘ The QTM ...
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Datasets with high frequency measures of monetary policy shocks for the US

I am looking for sources (datasets) with high frequency measures of monetary policy shocks for the US. For the Euro area I have found this, MPD DATASET. I haven't found anything similar for the US. I ...
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Ricardo Reis and S&D decompositions of inflation

In this presentation at around 21:20, Ricardo Reis discusses a two-sector New Keynesian model to explain that the supply and demand decompositions of inflation by Adam Shapiro as not as informative as ...
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Why limit the maximum size of deposit-CBDC transfers?

From page 33 of Dirk Niepelt's Money and Banking with Reserves and CBDC (October 2022): Some central banks consider caps on CBDC balances to limit the maximum size of deposit-CBDC transfers ("...
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Why raise UK interest rates to control inflation Now - May 2023?

The usual reason given for raising rates to control inflation is that it reduces consumer spending, increases borrowing costs and slows the economy. However, in an environment where the inflation has ...
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Ex post predictability of "mps" in Bauer, Swanson (2022)

I am reading the paper "A Reassessment of Monetary Policy Surprises and High-Frequency Identification" by Bauer and Swanson (2022). In Section 2, there is a Bayesian updating model that goes ...
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Do borrowing costs go down as a currency depreciates?

I was watching a video (https://youtu.be/2CVOfzuqoY4) and got very confused by the following sentence at 1:18: "Usually when an established currency depreciates in value, borrowing costs in that ...
ayazasker's user avatar
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Do IRF of macroeconomic variable to monetary policy shock represent the "true" dynamic effects of monetary policy on the variable?

If the question needs clarification, I will be more than happy to revise. Also, any help would be greatly appreciated.
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What does it mean to identify a monetary policy shock

Any help would be greatly appreciated.
EHMJ's user avatar
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Why do sticky prices make output partly determined by demand?

First time going through the basic new-keynesian model and i understand the math behind it okay. I also get that output being partly demand determined is the transmission mechanism for monetary policy ...
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Federal Funds Rate & Reserves Market Contradiction

Edit: I do understand this isn't how things work anymore, since we are in a "Ample-Reserves Framework" and the quantity of reserves no longer makes a difference that much and it is primarily ...
ayazasker's user avatar
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India and the Impossible Trilemma

This question is in the context of the impossible trilemma. India does not have full capital convertibility on its currency. According to the trilemma, it should be able to have an independent ...
Kroose Smith's user avatar
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What tools the central banks and governments can use to tame profit-led inflation and is the monetary tightening one of such tools?

While the central banks and the governments is not acknowledging it, the private bankers and economists are constantly labeling current inflation trend as the profit led inflation. This morning UBS ...
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How can Real GDP increase while Money Supply remains fixed?

I'm studying the Money Market Graph with it's Money Demand and Money Supply curves. In the classical model they teach the Money Demand curve as sloping down to the right while the Money Supply curve ...
ayazasker's user avatar
16 votes
12 answers
6k views

Is money we make completely taken away by taxes?

In my opinion, any money we make will be completely taken away by taxes. Here is my logic. When I earn some money (x), I have to give some as tax to the government. ...
Tamila Ambeon's user avatar
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1 answer
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Cholesky Ordering in Monetary VAR

In some papers in monetary economics (see below), I've seen used a 4-equation VAR with log industrial production, log consumer price index, the federal funds rate (FFR), and the excess bond premium (...
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Visualizing the "Impossible Trinity"

I would like to create a data viz to show, in one chart, where some of the major economies are on the trilemma. It won't be perfect, but I'm just looking for a rough characterization. For my data viz ...
Arash Howaida's user avatar
3 votes
0 answers
35 views

Stationarity concerns in typical monetary VAR

In monetary economics, I've seen the following 4-equation VAR with log industrial production, log consumer price index, federal funds rate, excess bond premium (a la Gilchrist and Zakrajšek) what ...
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Understanding the terminal condition in the Taylor rule

I am currently reading this summary of various theories on how central banks control inflation. However, I got quite confused in section 3.2.4. Here is the context. Suppose we have a log-linearized ...
Wittgenstein's Poker's user avatar
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Do U.S. Fed Interest Rate hikes and bond yields have a causal effect on each other?

I understand that there is a strong causal effect between U.S. Fed rate hikes or decreases on U.S. bond yields. But does the relationship also go the other way, e.g. U.S. Fed hikes/decreases in ...
StatsScared's user avatar
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Open market operations vs quantitative easing

I’m a little confused about the distinction between open market operations of a central bank and quantitative easing/tightening. My textbook essentially defines both as instances where the central ...
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How do higher debt-servicing costs cause financial crises?

I want to understand the context of an article (Economist, Finance and Economics section, Oct 28th, 2022) Bruno Le Maire, France's finance minister: "Money is no longer interest-free in the new ...
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How do changes in US government bond yields impact the USD exchange rate?

I would like to understand how changes in US government yields impact the USD exchange against other major currencies, eg. the Canadian dollar or the yen. My question assumes that the bond yields ...
StatsScared's user avatar
2 votes
2 answers
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Why do monetary authorities (e.g., central banks) aim to impact "short-term" interest rates? Why not also long-term interest rates, or both?

When the Fed or a central bank changes interest rates, this impacts short-term rates first and foremost. But why is it that short-term interests are impacted as opposed to short- AND long-term, or ...
StatsScared's user avatar
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UK gilt yield melt up - fiscal dominance - preferences versus constraints

In 1962, Milton Friedman dismissed the notion of "central bank independence" as a polite fiction, saying "it would not survive the first real conflict with government." Since then, ...
Arash Howaida's user avatar
8 votes
4 answers
5k views

Can someone explain why sterling-dollar parity is bad?

Please forgive the probable naivety of this question. I am not an economics student I am just trying to understand the currency fluctuations that are currently occurring with GBP as a result of our ...
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