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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Implications of abolishing Fractional Reserve Banking on mortgages and interest rates

Suppose for a moment that someone with legislative power decides to abolish Fractional Reserve Banking and passes a law that forces banks to only lend the money they own, that is M0. What would be the ...
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What limits central banks from setting highly negative interest rates?

What limits central banks from setting highly negative interest rates if needed? Is it only that people can take out a lot of cash and put it in a vault, or are there other reasons? If we had removed ...
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France place in the eurozone in terms of prudence

When I think about the eurozone countires in terms of governments economical prudence I, as many, divide them into the northern prudent(Nordic+ Germany) and the less prudent southern(Grecce, Italy, ...
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Brainard on ELB Policy

In this speech, FRB Governer Lael Brainard suggested the following approach to monetary policy at the Effective Lower Bound: .....I have been interested in exploring approaches that expand the ...
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2answers
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What does it mean to “kickstart the economy”?

This answer claims that: the central banks have been lowering and lowering [interest] rates, desperate to kickstart the economy, but it's not been working What does "kickstart the economy" mean ...
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Cash and negative interest rates

Recently, I read an IMF blog on how the negative interest rate policy can be implemented feasibly here. I don't really understand what they are saying in this paragraph: When cash is available, ...
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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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bank lending channel and bank capital channel: mechanism step by step

In any definition of these concepts, I miss the first step: how exactly does expansionary or contractionary (rate changes, req. reserve changes, ... ) monetary policy affect bank deposits and bank ...
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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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What justifies the authority of a bank to create money when they make loans?

This is somewhat of a political or philosophical question. As explained by the Bank of England and elsewhere, the majority of broad money is created by credit to banks' accounts when they make loans. ...
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Are CPI stats weighed based on population size

Generally inflation and CPI are reported on a national level. If a country for example has 10 cities, after surveying prices in each individual city, how is the total CPI number determined for the ...
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What was the difference between the UK government’s special liquidity scheme and quantitative easing?

How exactly were the two schemes related and was the lending of treasury bills the same as electronically creating money to buy bonds?
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Why is there a big change in the money supply at the beginning of each month?

I was watching Argentina's daily change in monetary base for a selected period and there is a clear spike at the beginning on each month. Then during the month it slowly goes down until reaching ...
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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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1answer
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Velocity of M1 versus M2 money

According to Pablo Kurlat's textbook on Macroeconomics, the graph of Ch 13 compares the velocity of M1 and M2 over the years. I don't understand why M1 velocity exceeds M2 even though M2 includes more ...
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How do central banks earn profit?

I thought of Central banks as the regulators of financial markets. But surplus reserves of some Central banks surpass giant corporate companies. Please explain me how do they manage to make profit in ...
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Where does the current debate stand on passive vs active monetary policy?

The debate between active and passive monetary policy is mentioned in most macroeconomics textbooks. Where does the current debate stand? Has a consensus been reached among economists? Do economists ...
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Can central bank interest rate hikes lead to a price gain in equities?

I ran an empirical analysis on recent interest rate changes of European central banks on Swiss equity prices and found statistically significant results. A 1 percentage point increase in interest ...
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Forward exchange rates and inflation

Looking at forward rates, the exchange rate for the currency with the higher interest rate gets worse over time. This makes sense or else there would be an arbitrage opportunity to borrow in the low ...
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2answers
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Which economist suggested solely printing money to borrow and not have bonds?

I remember reading this really interesting idea by some economist that a government need not issue fixed-term debt such as bonds, notes or bills. Instead all it could do is print money and use it to ...
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1answer
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What does it mean by Global recession?

I am bit curious to understand what it actually means when I read global recession is coming soon. There are some questions which pop in my mind reading such news. Some of them are: What causes ...
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What is the point of a constant (thus known) inflation rate?

I have read somewhere (attributed to Milton Friedman) that a good practice of monetary policy is to maintain a constant inflation rate (of 3% per annum, say). What is the point of that? If everyone ...
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1answer
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Isn't the liquidity trap about real interest rates?

Here is a so-called thought experiment. Suppose the inflation rate is negative, the nominal interest rate slightly negative, and the real interest rate positive (call it $r$). I think people would ...
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What stops this from happening under fractional reserve currency [closed]

Bank A has $1. Bank A creates $10 fractional reserve money and deposits into bank B. Bank B now has $10. Bank B creates $100 and deposits into bank A. Repeat What stops banks from creating ...
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1answer
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The Fed Lowered Interest Rates, Are they going to buy Bonds?

I originally asked this question on personal finance/money because I didn't know that this exchange site existed. link to same question at person finance/money. Someone on that site mentioned that it ...
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Should Finland leave the eurozone?

Finland's economic recovery from the shock of the global financial crisis of 2007–2008 has been very weak. The country has been in recession for the past three years, with GDP expected to expand by ...
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What is the privilege of a primary dealer?

Primary dealers have a privileged position, so there is value in being registered as a primary dealer. - https://economics.stackexchange.com/a/13450/8387 I was previously under the assumption that ...
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Why aren't open market operations a zero sum transaction?

I know that when the Federal Reserve buys Treasury bonds it increases the money supply, but I don't understand the process behind it. The model that I have given below (which is my best understanding ...
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What is it about the money market safeguards that increase volatility?

In recent coverage of the Fed's repo operation, I was struck by this line: It also indicated Wall Street is struggling to absorb record sales of Treasury debt to fund a swelling U.S. budget ...
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The effect of Monetary Policy on Asset Price Inflation

My macroeconomics professor told the following: A decrease in interest rate causes that consumers rather spend their money on investments (stocks, houses) than put the money on the bank, and the ...
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How does monetary policy affect inequality?

My thought process here would be that since government bonds are usually held by the richer households, buying of these government bonds would inject a large amount of money only to the richest, thus ...
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Why currency purchasing power is linked to confidence in central banks

From the New Statesman, http://www.newstatesman.com/politics/economy/2016/02/coming-storm, "Ever since the collapse of the Bretton Woods system of pegged exchange rates in 1971, the sole guarantee ...
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Is money mostly created (out of nothing) by banks making loans?

In the Bank of England's Quarterly Bulletin, 2014 Q1, McLeay, Radia, & Thomas write a pair of articles titled: "Money in the modern economy: an introduction" and "Money creation in the modern ...
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Why can't countries print another country's currency?

Counterfeiting money is clearly a difficult thing for individuals, but surely a country should have no problems counterfeiting another country's currency. Why don't countries do it? For example, for ...
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The effect of financing of government debt on the yield curve

Is it reasonable to expect that the US govt's financing of the growing budget deficit and US debt by issuing long term treasury bonds will push long term interest rates higher in the future? Shouldn'...
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1answer
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Why does equity have historically poor performance after rate cuts?

I am struggling to understand why equity markets seem to suffer shortly after fed rate cuts. Here is a rather telling chart: Question Assuming not some kind of spurious relationship, what's the ...
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How does the Fed choose its asset purchase rate in an ample reserves era?

The St. Louis Fed's article "A New Frontier: Monetary Policy with Ample Reserves" states that the Fed now uses the IOER and ON RRP rates to set the FFR, instead of open market operations, which are no ...
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which policy (fiscal or monetary) is better to stabilize the cycle?

I am currently studying for a test and the following sentence "In an open economy with high capital mobility, monetary policy is preferable to fiscal policy to stabilize the cycle", the "answer" is ...
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How is monetary policy sustainable, or even fair, in the current economy? [closed]

I've just read Money Creation in the Modern Economy, an article published by the Bank of England. I'm trying to wrap my head around this from multiple points of view, since it brings about a lot of ...
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Wouldn't abolition of cash give rise to a substitute currency?

Some countries (e.g. Sweden and Denmark) plan to abolish physical cash in the future and restrict the use of cash to electronical deposits. One of the reasons for this is to prevent hoarding / boost ...
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What is a monetary policy shock?

I am trying to understand some basic stuff about New Keynesian models and monetary policy. Despite that almost every single paper on monetary policy talks about monetary policy shocks, I still don’t ...
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Why the historically narrow asset class purchases from QE

Let's begin by mapping out some context by assuming the following goals of implementing QE: prevent dire systemic liquidity concerns reach inflation targets manage expectations in the private sector ...
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What is the optimal fiscal transfer rate between regions in a currency union?

I'm aware of the theory of optimal currency areas, and that both the Euro and the US dollar* are technically not optimal. This would tend to cause their optimal monetary policy to diverge over time. ...
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Currency board, why the fluctuation in local currency

I have very basic question about currency boards: Assume that a country floats a new local currency "N" with the currency board model. It uses USD as the reserve currency. To begin with 1 N = 1 USD. ...
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Would a perishable currency work in a financial crisis today?

I read about perishable currencies in the following article Now my question is if there have been any studies on this and if this may work in modern financial markets?
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Exchange rate target zone 45 degree line in the free float case - Krugman Target Zones

As far as i understand in the Krugman target zone model the following equation describes the behaviour of the exchange rate within and outside a target zone $s_t = f_t + \alpha E_t(ds_t/dt)$. But if ...
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Characteristics of monetary sovereignty

I would like to explore how much of a consensus there is regarding the term "monetary sovereignty" and how precise we can articulate it. The broad concept being: The power of the state to exercise ...
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Different explanation for economic growth, depending on the length of the period considered

I'm being introduced to macroeconomics, and a colleague asked why do we say that in the short term the productivity of a country is determined by the "demand side" (IS/LM model) while in the long run ...
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1answer
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Monetary policy and potential output growth

Can monetary policy affect potential output growth? And if yes, how is this consistent with the neoclassical thesis's of money neutrality in the long run?