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
116 views

Printing money to put into a Superannuation or UBI fund

It is fiscal policy to keep inflation at between 1-2% (in New Zealand at least) Various tools are used to keep inflation in this range. Let's say the average inflation rate is 1.25% What would ...
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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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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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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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47 views

Expected inflation in the real interest rate equation

Real interest rate = Nominal rate - Expected inflation In the above equation, in a quarterly data-set, which expected inflation shall be used? next quarter (q+1) or the same quarter of next year (q+4)...
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50 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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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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Why lower the deposit rate if it is already negative?

The European Central Bank (ECB) has been lowering the interest rate on its deposit facility, first to -0.1% in June 2014, then to -0.2% in September and eventually to -0.3% in December 2015. But what ...
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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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Imports/Exports in the equation of exchange

From the equation of exchange: $MV=PY$, where $M$ is the money aggregate, $Y$ is the real output, $P$ is the price level and $V$ is the velocity of money, we derive $\% \Delta M + \% \Delta V = ...
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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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Why was the price of gold lower when gold confiscation act was issued but raised afterwards?

I was reading up on the gold reserve act which made it illegal for US citizens to own gold with some minor exceptions. According to the gold confiscation act which was issued before the gold reserve ...
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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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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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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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2answers
66 views

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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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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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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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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Monetary policy: increasing interest rate

What happens to the quantity of treasury bonds when central bank sells short-term bonds? The overall question for the assignment is: Suppose that the central bank of a country decides to increase the ...
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37 views

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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411 views

What is the effect of expansionary fiscal policy in case liquidity trap situation?

I've read that liquidity trap means interest rate is at its minimum and increase in real money stock will not lead to fall in interest rate because people will be demanding whatever the amount is ...
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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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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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66 views

Does a negative interest decrease the money supply?

If there is less money, its value increases. There is less liquidity when there is less money. Does a negative interest decrease the money supply? Especially when people don't need money: they saved ...
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47 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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50 views

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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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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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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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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Negative neutral real interest rate

What is the intuition behind having a negative neutral real interest rate?
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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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313 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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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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Which is safer in the long-term, diffuse debt or concentrated debt?

I want to deepen my understanding of risks as posed by debt burdens among actors of an economy. After some literature review, it seems the matter is nuanced; points can be made for both sides. I'll ...
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Why does the Fed feel the need to reduce its balance sheet? [closed]

Why does the Fed feel the need to reduce its balance sheet? What is the problem with the Fed having a large balance sheet long term? What would happen if the value on the Fed's balance sheet ...
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Why would China's FX reserves stay flat as the Fed ramps up its balance sheet?

As seen in the chart, China's FX reserves have remained flat lately despite the massive balance sheet expansion of the Fed. Though out of the temporal domain of this chart, if it were extended back to ...
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Limits to Quantitative Easing Programmes

I have been reading recently on the quantitative easing programmes by the ECB and the BOJ, see http://www.cnbc.com/2016/04/07/what-the-bank-of-japan-boj-will-do-now-that-negative-rates-have-...
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How exactly does QE affect the value of the USD?

A lot of people on the Internet refer to quantitative easing (QE) as a form of "legal money printing" when it is actually not. As such, many of these folks would thus erroneously say that QE leads to ...
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Is increasing the money supply possible with a gold standard? How about controlling interest rates?

I understand that under a fiat currency, the government can buy securities on the open market to increase the money supply, and decrease interest rates. This monetary policy is possible to help ...
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What determined the “cost of borrowing money” or the interest rate in a gold-based economy

In the modern economy, the central bank decides the cost of borrowing money using interest rates along with other several tools and technic. But I was wondering, in a gold-based economy (not the gold ...
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Why doesn't QE cause the federal funds rate to continue decreasing?

Quantitative easing (QE) is essentially a large-scale form of open market operations, in which the Fed buys large amounts of treasury bills of all maturities (ranging from 1-month to 30-year) and ...
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What does the Fed mean by “smoothening money market functioning”?

In many recent interviews, Fed Chairman Jerome Powell has repeatedly mentioned that ensuring the smooth functioning of money markets is a key goal of the Fed's recent monetary policy actions. I want ...

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