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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1answer
39 views

How can the Fed enforce exit criteria if they begin yield curve control?

Over the past year, the notion yield curve control has resurfaced and appeared on FOMC minutes, decades after its last implementation. According to the Fed's introduction page: As the U.S. continued ...
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43 views

Seemingly contradictory relationship between bond yields and economic growth?

I have a few seemingly contradictory ways of viewing the relationship between economic growth and bond yields: Reductions in FFR are largely induced by IOER. Since IOER and bonds are competing ...
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Does Modern Monetary Theory (MMT) provide a useful insight into how to manage the economy?

According to advocates of MMT, the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes to reduce the spending capacity of the private sector. ...
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What is the mechanism for when the fed purchases a gov't or corporate bond from a non bank?

My understanding is when the fed buys a bond from a bank they use bank reserves (bank reserves are swapped for a bond). How does the transaction differ when a non bank (ex hedge fund) is involved?
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Sidrauski Monetary Model and Neutrality

In the Sidrausk model, money is in the long run super neutral. Does this result only apply to the case where money and consumption are separable in the utility function, or also to the case where they ...
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Help with AP Macroeconomics FRQ [closed]

I am a senior in High school and am taking an AP Macroeconomics course. I just took an FRQ and received an F on it. I asked my teacher multiple times to explain why my answers were wrong, but to no ...
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I there an established correlation between Federal Reserve balance sheet and MB( monetary base)?

More precisely: Are there any implied bounds for the ratio M0/FRBS with MB= the monetary base and FRBS=Federal Reserve Balance Sheet? https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm ...
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88 views

What are the advantages of using euro for Greece?

Theoretical benefits of using unified currency are well known and described in many places like https://www.economicshelp.org/europe/benefits-euro/ However, reality (or more comprehensive analysis) ...
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How did investment go from exogenous to endogenous in the IS/LM model?

Context: I am currently taking an introductory course to macroeconomics and we are on the topic of Keynesian Economic and the IS/LM model. Initially we saw that the investment (I) component of ...
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1answer
35 views

Is It Possible for a Country to have a Gold Standard without a Fixed Price of Gold?

It is my understanding that at the beginning of the 20th century, many, if not most, countries had a monetary system that was based on a gold standard. However, by the end of the 20th century, most ...
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Does the Fed/SEC have tools to address shock-propagation from correlation of fund flows?

Premise In 2017, passively invested assets totaled 37% of mutual funds and ETFs; by 2021 this number is closer to 50% if not more. After the market downturn in (March) 2020, the Fed updated their ...
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Bank Charter Act of 1844 vs banking landscape 2021 - regulatory capture or policy obsolescence?

A driving motivation for the Bank Charter Act of 1844 was to institutionalize/centralize seignorage and impose limits on how much influence commercial banks have in terms of money creation (along m4 ...
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Derivation question: Gali (2015), chapter 5, equation 25

I am wondering how Gali derived equation (25) in chapter 5 of his book Monetary Policy, Inflation, and the Business Cycle (2015). We have equation (21): $$ \vartheta \hat{x}_{t} = -\kappa \hat{p}_{t} +...
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Do open market operations permanently increase the money supply?

Suppose the Fed buys 1000 dollars worth of T-Bills in the open market to try decrease interest rates and increase the money supply. It does this by printing money and electronically increasing the ...
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Please help solve a bank's maximization problem

I want to solve following maximization problem: $\underset{\{i_{t}^{l}(i),i_{t}^{d}(i),B_{t}^{l}(i),B_{t}^{d}(i),R_{t}(i)\}}{\max } i_{t}^{r}R_{t}(i)+(i_{t}^{l}(i)-\mu ^{l}) B_{t}^{l}(i)-(i_{t}^{d}(i) ...
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Is a binding ZLB a binding constraint?

Usually, in an optimisation problem, a binding constraint is one at which the optimal solution holds at the constraint with equality, i.e. it's a boundary solution. However, in many articles, for ...
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What is the point of monetary policy if most monetary variables are determined by non-monetary factors?

Monetary policy today is largely focused on setting interest rates in order to reach an inflation target / value of the currency. Interest rates are used to affect inflation by changing the demand and ...
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What happens when government bonds purchased as part of central bank quantitative easing (QE) reach maturity?

Does the central bank ask the government to pay or are they rolled over?
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37 views

Asset bubbles and empirical findings for monetary stimulus' effect on productivity

It may be fairly empirical that leveraged investments can cause "asset bubbles" that often result in really highly priced assets (which I'll refer to as the ("leverage argument") --...
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41 views

How low can interest rates go? How deeply negative?

Ten years ago, negative interest rates were an impossibility, an intellectual curiosity. Now it's a common policy. Just read a claim that there is still an absolute lower bound, even if it happens to ...
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2answers
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What would monetarists do when interest rates approach zero and become ineffective?

So monetarist economists such as Milton Friedman focus on managing the money supply and lower interest rates as a solution to economic downturn. But what would they do in a recession as the interest ...
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1answer
58 views

How did the silver standard “insulate” China from the beginning of the Great Depression (1929-1931)

There is a segment from this article that I want to unpack: The Great Depression was a global crisis—almost. Every significant economy was devastated, with one notable exception: China. The reason ...
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4answers
580 views

What are some of the good textbooks on Modern Monetary Theory and the Development of Monetary Theory?

I am trying to study modern monetary theory for my research. Recommendations, please? Thank you!
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Where to find information to establish causation between economic policies and economic data?

I've merely taken a few economic courses in college -not an economics major-, so my knowledge regarding the field is limited. Lately I've been interested in learning about the economic impact of ...
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Why did John Keynes believe that monetary policy to be less effective than fiscal policy?

So why did John Keynes believe that monetary policy to be less effective than fiscal policy for stabilising the level of economic activity, particularly in a recession? Lowering markets' interest rate ...
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Is there any variable commonly used as a proxy for the inflation target set by the Central Bank?

I have been asiggned to estimate a monetary policiy rule à la Taylor for my macroeconometrics class. There are no explicit inflation targets stated by the Central Bank (of the country I am the ...
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If I shred a $20 bill, is society poorer? What is the effect on the real economy?

If the answer is yes, society is poorer, then the converse must hold true: that the government could make us all wealthier by simply printing money. However, a collapse in the money supply must have ...
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52 views

Why Keynesians prefer short run measures despite straight long-run Phillips curve?

I was studying about the Monetarists' and Keynesians' view of the Phillips curve and natural rate theory of Friedman. It seems intuitive to me as to why Friedman argues that using an expansionary ...
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35 views

Could low interest rates encourage savings?

We normally assume that a lower interest rate will induce less saving as the returns on saving are lower. However, if a central bank committed itself to a low or even negative interest rate for a long ...
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How is reserve money 'multiplied' by the banking system?

I'ma an econ newbie so please forgive my lack of understanding. I am confused as to how the money multiplier effect works. I get that the money multiplier effect doesn't actually hold true as banks ...
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Log deviation from steady state - understanding a journal paper

I hope a question like this is fair game on this website! I'm doing some research for my thesis, and have come across what seems to be a pretty simple model - two countries, A (representing the USA) ...
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Mankiw's version of the Cagan model - need help interpreting it

To keep the math as simple as possible, we posit a money demand function that is linear in the natural logarithms of all the variables. The money demand function is $$m_t - p_t = -\gamma(p_{t+1}-p_{t})...
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How would a global Robin Hood deed affect the economy? [closed]

In one fiction series about a dystopian world, a small group of wealthy criminals owned a large fraction of the world's cash, which was on their bank accounts in a single offshore bank. In the happy ...
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3answers
114 views

Why would a CBDC (Central Bank Digital Currency) be good for the economy?

I've read about CBDC, how it could be a cryptocurrency like digital payment system, that could replace fiat currencies. But what I don't get is what value would it give to the economy? Someone who ...
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Why is deflation a likely short-term of an increase in M2?

The year-on-year growth in M2 — a broad measure of US money supply — has rocketed this year due to the efforts of monetary and fiscal policymakers to reduce the economic damage caused by the pandemic. ...
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96 views

Why may printing trillions of dollars not lead to inflation?

By definition, inflation should be affected by the increase of the money supply. During the pandemic, there have been numerous huge monetary policies executed, e.g., quantitative easing (QE), ...
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56 views

Does inflation equal change in M1 or M2?

According to monetarism, inflation can be predicted precisely by the change in money supply and GDP growth. Does "money supply" here refer to M1 or M2, i.e. does it include debts created by ...
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Monetary policy rate and fiscal deficit

A colleague in work mentioned today that Chile is keeping a flat monetary policy rate given "there is a higher expected fiscal deficit". If there is an expected fiscal deficit (i.e., ...
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62 views

Policy ineffectiveness proposition

Suppose, the Aggregate supply is given by the Lucas Supply Curve - $y_t = ȳ + b(P_t - E_{t-1}P_t) + μ_t$ where $μ_t$ is stochastic supply shock (following standard normal error properties). Aggregate ...
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How can non-US banks issue USD loans?

I understand, commercial banks are entitled by the Central Bank to "create new money" when they issue a loan and correspondingly "destroy the money" when the loan is paid back (...
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Are quantitative easing and helicopter cash really different tactics? And how does QE relate to Modern Monetary Theory?

I've been trying to get a clear understanding of exactly what economists mean by Quantitative Easing (QE). It seems to me that different people mean different things by it. I find simplistic analogies ...
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How buying bonds indirectly from the government prevents the central bank from financing government deficit?

From Krugman's macroeconomic textbook (highlighting is mine): "In an open-market operation the Federal Reserve buys or sells some of the exist- ing stock of U.S. Treasury bills, normally through ...
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Is QE the equivalent of printing money?

I heard somewhere that QE is not the same as printing money -- in fact as I know it, QE is the purchase of assets in exchange for more liquid and high-quality, better collaborated debt. In other words,...
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Equation of exchange and inflation target

The inflation target is $2$% and the equation of exchange states $MV=PQ$. Is the idea that we want to have greater money supply growth then real growth in general?
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470 views

Why does an economic slowdown lead to deflation?

Usually economists say that in recession there is deflation, so increasing the money supply does not lead to a high level of inflation. According to the Quantity theory of money, the price level is ...
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Relative importance of the federal funds market in the post-2009 US economy

In the pre-financial crisis US economy, depository institutions had almost no excess reserves. Hence, it would make sense for some banks to have shortages of reserves and some with excess of reserves. ...
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Pareto efficiency analysis of level of M1 growth from quantitative easing

BMO recently conducted an analysis on US monetary policy and noted that quantitative easing has had diminishing effects on M1 growth. Daniel Krieter wrote: QE has fed through to the real economy in a ...
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41 views

Negative neutral real interest rate

What is the intuition behind having a negative neutral real interest rate?
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316 views

How is using a reserve fund different from printing money?

It is a common knowledge and has been explained here on SE that the source of value is production and consumption rather than money, and that accumulating money is thus pointless. Yet, "rainy day ...
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74 views

Macroeconomics differences of 2008 financial crisis and 2020 economic crisis

How is 2020 financial crisis different from 2008 financial crisis? For example, why have stock market indices (e.g. S&P500, NASDAQ-100) recovered so quickly (about 3 months instead of longer than ...

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