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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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 ...
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I've asked chatGPT to ask chatGPT [closed]
I have recently posted this question.
I realized I could post a lot of similar ones by just exchanging the variables; but I just asked chatGPT to write a prompt similar to my own and asked it that one ...
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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 ...
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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 ...
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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. ...
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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 ...
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Maximising social welfare in time inconsistency
I have solved a number of issues that have a loss function which I need to minimize subject to the Philips curve.
I was wondering if anyone knew the method for solving this model generally, to acquire ...
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Can the Fed help with the Debt Ceiling by forgiving SOMA bonds
There have been previous questions on here discussing whether the Fed and Treasury together could agree to cancel some of the bonds in the SOMA portfolio. Previous conclusion was that this would not ...
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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 ...
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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 ...
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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 ...
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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 ...
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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, ...
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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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Impact of China and European Union on Canadian Inflation
I'm currently working on a project where I'm trying to determine the impact of the European Union and China on the Canadian economy, specifically, the inflation and policy rates for the next 2-3 years....
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What is the effect on shelter prices of raising interest rates?
In the UK, a rise in rates causes a rise in mortgage repayments. It can lead to landlords raising rents due to margin pressure, if their mortgage is not fixed or is close to the end of its fixed ...
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Special Repo Rates below General Repo Rates
I've been hearing more and more about the divergence between "special" repo rates, where a specific security is posted as collateral, versus "general" collateral rates, where a ...
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Why doesn't conventional monetary policy involve long-term interest rate targets?
Another way to phrase my question: why doesn't conventional monetary policy include manipulation of long-term interest rates?
This question might sound "weird" at first glance, but please ...
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Does having a dual mandate erode central bank independence?
To begin with, CB (central bank) independence is defined as not being subject to government influence.
If CB only cares about inflation, it is easy to be independent.
If CB also needs to guarantee ...
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How the fed influences treasury rates through open market operations
Lower yields through open market operations
When the fed wants to put downward pressure on treasury rates, one tool it can use is open market purchases of the tenor it wants to push yields down on. ...
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What were the benefits of creating ON RRP (versus expanding the availability of IOR)?
I'm not understanding why the Fed decided to introduce their Overnight Reverse Repo Facility (ON RRP).
From the St. Louis Fed, it helps to provide a floor for the Federal Funds Rate (FFR), a market-...
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What is the purpose of forward guidance during rate hikes?
It seems the primary purpose of forward guidance is to stabilize long term interest rates, even when the Fed has only control over short term rates. It is especially useful for when the BOJ and Fed ...
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How is a central bank able to control currency supply in an economy which has other banks and non-physical currency?
As I understand, in most economies, the central bank is supposed to be in charge of monetary policy, which in part means that they are supposed to be the only authority which can increase the amount ...
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Romer & Romer shocks update
I'm wondering if any researcher has tried to update the Romer and Romer monetary shocks dataset until the most recent period. The only thing I've seen in this respect is the below reference (but there ...
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Is there alternative to the monetary tighetning when the inflation is caused by scarcity (supply-side shocks)?
Current economic crisis is created by sharp reducing shocks to the supply side - bad economic weather, political restrictions to the trade, service availability reduction in the transportation sector. ...
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Contractionary vs Expansionary
If an economy's real trend growth rate is 1.0% and the target inflation rate is 2.0%, a central bank interest rate of 2.5% would most likely be described as... Expansionary??
As I understand it, a ...
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Federal Funds Rate vs Interest on Reserve Balances in 2022
In the US context: Circa 2020 the minimum reserve balance requirement was removed, so I am not sure why do institutions need to borrow and lend overnight reserves among themselves?
As far as I ...
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Given a large increase in the price of an essential good, can suitable monetary policy keep average inflation very low?
Suppose there is a very large increase in the world price of an important good which is essential for many people, such as the increase in price of natural gas over the last year or so.
Considering ...
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Is it correct to distinguish between "monetary" and "price" inflation?
As the questions says.
Should we distinguish between both. Or are they the same thing?
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Who benefits/is worse off from "death of forward guidance"?
A few months prior, I asked: What is the worst potential outcome if the Fed "loses credibility?" where a great answer pointed out that forward guidance allows a central bank to achieve ...
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What is meant by "expansionary fiscal policy" and "tight monetary policy" in G. Soros' statement in his book The Alchemy of Finance?
I came across the following idea from George Soros' book The Alchemy of Finance which is also discussed in the book The New Market Wizards (by Jack D. Schwager) during the latter's interview of S. ...
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Eurozone crisis between 1990s-2010(?)
Earlier when the Eurozone is established, the countries have a problem of competitiveness: the growth of wages is much faster than the growth of productivity. This high salary results in high prices ...
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Is it accurate to say reverse repo is 'conflicting' with monetary policy?
As seen in the chart, historically, reverse repo levels have been fairly small or at most, a few hundred billion dollars:
Now into the USD trillion handle, it's a more prominent fixture of the money ...
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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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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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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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