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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When interest rates are historically and exceptionally low why are businesses still acting negatively to their increase?

Usually when interest rates rise businesses cannot borrow so the amount of capital they have available goes down which then means they hire fewer people and wages go down so inflation goes down. This ...
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Why doesn't the Fed restrict its open-market operations to Gold?

The Fed has traditionally bought and sold Federal government bonds (and agency securities that we may conceptually include within Federal government bonds). The first question is: what would be the ...
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Can a recession caused by drastic increases in the official interest rates be good for the economy in the long run?

Most of you are probably aware that a lot of the countries are increasing their official interest rates in order to fight inflation. Interest is an expense for the companies and individuals, thus an ...
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Japan: Will the quantity of money per unit of output and the consumer price index show a huge divergence in the decades after 1980?

Milton Friedman, in one of his talks in 1980, showed a series of examples to illustrate his statement that inflation was a monetary phenomenon. One of the examples he used was Japan. The following ...
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What constraint is there on velocity of money?

MV = PY I am trying to develop an intuitive understanding of it. M = Money Supply, V = Number of Transactions, P = Average Prices, Y = Output/Income. The equation seems to suggest that if money supply ...
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Why does the fed funds rate affect short and long term interest rates? [duplicate]

I am a little bit confused about the mechanism as to how changes in the fed funds rate end up impact other interest rates in the economy. My understanding of the fed funds rate is that it is the ...
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Which empirical correlations are known between the velocity of money circulation and economic factors?

Usually the velocity of money is calculated as a ratio of GDP (or similiar) over a monetary aggregate (typically M2). But, it is debatable whether that simple ratio is really measuring the rate at ...
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In what ways will taxing corporations reduce inflation?

President Biden Tweeted to the effect that taxing corporations will reduce inflation. When I look at what goods are experiencing the most inflation it seems to be things like groceries and rent. What ...
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Why do reserves increase when the Fed buys bonds? (Introduction to Macroeconomics)

A question asks, "If the federal funds rate were above the rate the Fed had targeted, the fed could move the rate back towards its target by _" and then the options are buying/selling bonds, ...
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Savings = Investment. High interest rates stifle investment. High interest rate encourage savings. Isn't this a contradiction?

If savings = investment, then by definition, higher interest rates encourage savings and hence more investment. But when it comes to monetary policy, central banks increase interest rates in order to ...
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How much of Australian inflation is demand driven or supply driven?

For the Aussies who have been keeping track with the current inflation rate at 5.1% we have seen the policy response by the RBA increasing the cash rate by 25 basis points so its now at 0.35%. This is ...
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Why does Putin want to be paid in rubles?

Putin demands other countries to pay Russia for its gas in rubles. He does this supposedly to strengthen the ruble. I don't fully understand why this is important for Russia. Imagine they pay him in ...
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Why does a balance of payment deficit lead to an outflow of gold under a pre-WW1 gold standard?

I am trying to understand how gold flows "out" of the country during a BOP deficit and why this results in a contraction of the domestic money supply. I am not sure if the following ...
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Real effect of monetary policy

In the article The State of New Keynesian Economics: A Partial Assessment, Gali says the following about the monetary policy in DSGE models: "Exogenous changes in monetary policy have nontrivial ...
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Did Russia peg Rubles to a Gold Standard?

Did Russia peg the Rubles to gold? I keep reading articles on that. Are there any catches or circumstantial facts, that Russia is not on a gold based standard? Trying to verify these articles. ...
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Does low nominal interest rate encourage lending?

In expansionary monetary policy, it's written: The Fed purchases more government bonds to drive down interest rates and increase the money supply. Now, low interest rate can infer two things: ...
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Does the money from Fed buying bonds go to Excess Reserves?

Suppose the Fed decides to buy $\\\$x$ of a bank's bonds. In the bank balance sheet, does the entirety of the money get added up in the bank's excess reserves (which the bank can loan out)? Thanks
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Impact of contractionary monetary policy and IS-LM curve shifts

Using the IS-LM diagram, show the impact of a contractionary monetary policy for a country when: (a) it does not affect expectations about future interest rates and output (b) it affects expectations ...
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If interest rates rise, the cost of paying off existing debt for companies will increase, won't this be inflationary?

I am fully aware of the standard logic that interest rate rises lower inflation by slowing investment. However, isn't it the case that any debt that companies have becomes a larger cost and hence puts ...
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The Fed and Raising Interest Rates

Recently the Federal Reserve raised interest rates by 0.25%. It seems to me that in the modern era there is no reason to pick a round number like 0.25%. It also seems to me that they could / should ...
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Meaning of “accumulation through mar­ket exchanges”?

I'm unsure as to whether this question belongs on the History or Economics stack exchange, but while reading a book on Soviet Union policies after WW1 I came across the term “accumulation through mar­...
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If someone from another country mines and sells cryptocurrency to an American for US Dollars what happens to the US money supply?

I would imagine this would act like a trade deficit and the money supply would go down. If I'm correct there, how does the Fed track these random depletions from the money supply? If they are ...
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Is there a long-run tradeoff between inflation and unemployment?

In most first-year undergrad macroeconomics courses, students are taught about the Phillips curve and how whilst there may exist a tradeoff between inflation and unemployment in the short-run, there ...
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What is the specific aim of the Russian Central Bank's decision to hike key interest rate during the Ukraine invasion?

The Russian Central Bank raised their key interest rate to 20% in the midst of economic sanctions in response to the invasion of Ukraine. In the United States, the key interest rate, as far as I ...
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What Happens to Govt Securities on Central Bank's Balance Sheet on Maturity?

To properly clarify the motivation of the doubt think of a hypothetical world when there are no business cycles and Central bank intervenes in the market only to provide enough liquidity to sustain ...
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Why did Allied countries not freeze German and Japanese central bank assets in WWII?

Supposedly such an action would cause massive turmoil in their domestic markets, cause exchange rates to rise, inflation to rise, and thus prevent them from engaging in meaningful trade. Why did ...
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What is the purpose of central bank selling government bonds besides reducing money supply e.g. to let the public earns more during recession?

I have learnt that such tool is usually to reduce money supply so as to close the inflationary gap. However, from my daily observation, central banks sometimes also sell bonds during recession. Is ...
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How important are exchange rates for achieving full employment?

We often witness large swings in exchange rates without significant effects on GDP growth or inflation. Obviously it is difficult to isolate exchange rate effects however are they actually that ...
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Are low rates a subsidy to banks?

Axel Leijonhfvud (Professor Emeritus, Department of Economics, UCLA) wrote in 2011: The Fed is supplying the banks with reserves at a near-zero rate. Not much results in bank lending to business, but ...
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Monetary and fiscal policies: problem and solution approach

Can the community recommend resources about macroeconomics / public finance that (roughly) follow the following design: Here's a macroeconomics / public finance economic problem (description, ...
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What are the standard models of monetary theory?

I am currently conducting research on a digital economy which has recently faced inflation issues and thus implemented monetary policy to tackle them. My paper seeks to compare how real life digital ...
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What is the worst potential outcome if the Fed "loses credibility?"

With Bullard recently stating: “Our credibility is on the line here and we do have to react to the data,” he added. “However, I do think we can do it in a way that’s organized and not disruptive to ...
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Does it matter for the effects of monetary policy that rents are negative?

Central banks commonly use some rent on the interbank market to conduct monetary policy. Central banks could for example decrease the rent aiming to stimulate consumption and investments. However, an ...
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Why don’t sovereigns like Venezuela just immediately replace the currency in event of a hyperinflation

I am struggling to understand why governments, when faced with hyperinflation, often let it drag out for years rather than bite the bullet and replace the currency. Given that by that point the ...
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How useful is the Fisher equation of exchange?

What empirical value does the Fisher equation of exchange MP=PV have given that the velocity of money, V, is measured as PY/M i.e. nominal GDP divided some preferred monetary aggregate? Surely there ...
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Monetary sterilization’s working is wrong?

Say, there is an increase in demand for dollars (as compared to the other currency, say yen), which will put appreciation pressures on dollar. Then to counter this appreciation, we need to buy yen. ...
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On what basis do countries repay international loans?

Most countries have their own sovereign currency. Essentially they can print their currency. So how do countries repay their loans? And a similar question would arise while granting a loan to another ...
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How do we know that inflation derives from supply chain issues and not from monetary expansion of Central Banks?

Everybody is talking about the fact that the current inflation derives from problems on supply chain distribution but Fed also printed tons of money. How can they affirm that inflation is from supply ...
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Can technological investments and advancements be used as monetary policy tool to fight high inflation (or its prospects)?

As of today (2021.12) inflation figures are high (the prospects are under discussions but risks of high inflation can be projected to the future as well) and monetary tightening is in the cards. That ...
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Is new money created when banks buy Treasury Bonds in primary auction?

From my understanding of the current monetary system when a bank issues a loan it is effectively creating money for the receiver of the loan i.e Mortgage. This increases the M1, M2, M3 numbers of the ...
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Choosing of an independent variable

I'm working on an estimation of the natural rate and I have as a dependent variable the long term rates and as independent variable the Inflation rate, a dummy variable for the entrance of a country ...
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Taylor rule estimation with OLS serial autocorrelation

I'm estimating the equation: $$i_{t}=\beta_0+\beta_1\tilde\pi_t+\beta_2\tilde y_t+\varepsilon_t$$ Where $\hat\pi_t=\pi_t-\pi^{target}$ and $\hat y=\ln y_t-\ln y^{\ast}$, are the inflation deviations ...
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If repo period is just one day, how do banks arrange the cash to repurchase the securities from the Central Bank?

The RBI (India's Central Bank) website says that "predominantly, repos are undertaken on an overnight basis, i.e., for one day period." So basically, the Central Bank buys securities from ...
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Why does the federal funds rate differ from the IOR rate?

If I am not mistaken, the federal funds rate is the rate at which commercial banks, money market funds and market makers pay for overnight US Treasuries. In theory, it should be equal to the IOR rate, ...
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monetary policy reaction function with gmm: optimal lag for instruments

(edited) I am estimating a Central Bank reaction function using GMM using monthly data. Following the literature, I used lagged values of each variable as instruments (are there other feasible options?...
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What is liquidity overhang?

I read in an economics article the following: RBI Governor has decided to keep the unwinding of monetary policy gradual, calibrated, and non-disruptive while remaining supportive of the economic ...
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Why isn't the Federal Reserve interest rate set by a published algorithm?

The Federal Reserve sets the interest rate, presumably based on a number characteristics and trends in the economy: inflation, GDP growth, population growth, unemployment, housing prices, etc. However,...
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Optimal monetary model

An economy is populated by identical, infinitely-lived agents (there is no population growth) that maximize the present discounted value of lifetime utility given by $$U=\sum\beta^t(ln\ c_t+Al_t)$$ ...
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Estimate a Monetary Policy Reaction Function with Generalized Method of Moments

I want to estimate a Monetaryu Policy Reaction function with GMM. I have well understood how to estimate a distribution (e.g. the normal distribution, the log-normal distribution, and so on) with GMM. ...
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Capital goods prices: data for Euro-area countries

For my bachelor's degree work I'm trying to estimate the natural rate of interest for euro area and I'm doing this following three main approaches: the first one is the one that defines the natural ...
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