# 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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19 views

### Creation of Money - Hypothetical Situation II

Continuation off this line of questioning. If I issue an IOU, it would need to be fungible, transferrable, etc in order to be considered "money." Understood - My follow up questions are: Remaining ...
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### What would happen in the IS-LM model if there is a simultaneous decrease in tax and interest rate?

Since there is a fiscal expansion with a decrease in tax i'm not sure what the interaction would be with a decrease in interest too, would money supply and output both increase? Thanks
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### Applying Econometrics to Monetary Economics

I've been given a problem in which I am told that GDP is a function of the supply of money, prices and demand, $$Y = (M/P)^\delta$$ Taking logs, $$\log(Y) = \alpha + \beta \log(m - p) +u$$ ...
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### The derivation of Central bank's loss function? [closed]

How to derive the central bank's loss function?
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### Creation of Money - Hypothetical Situation

Imagine you sell me some consulting services. I don't have any cash, so I give you a $100 IOU instead. You now have a$100 Note Receivable on your Balance Sheet. ...
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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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### What amount of Quantitative Easing will cause hyperinflation?

You all know that Quantitative Easing shifts the LM and AD curves right, so I haven't taken the time to redraw this picture. What's the maximum amount of Quantitative Easing that the Federal Reserve ...
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### what would be an efficient investment when central banks have massive qe?

Recently the central bank said in a statement on its website. “Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift ...
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### Allowing the reserve requirements drop to zero

On 15 March 2020, the Federal Reserves announced that it would cut its benchmark rate to near zero and that it would also reduce the reserve requirements ratio to zero percent. This is part of its ...
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### What would be a good way to pump the economy from bottoms-up (consumers) instead of top-down (banks) monetary policies?

Economists rely on top-down policies to reinvigorate the economy. They perceive just handing over money to consumers as a waste of money since the economy won't grow in the sense that new industries ...
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### Why can money be described as “government non-interest bearing debt”

Trying to get some intuition on this statement I came across while reading Miguel Didrauski's dissertation "Rational Choice and Patters of Growth in a Monetary Economy". My sense is that it has ...
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### Negative real rates on yield curve

If you look at information on the Treasury website, you will notice that currently, the real interest rate on the entire yield curve is negative. If you check the nominal rates in the short term, you ...
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### Are Open Market Operations a Gift to the .1%?

My Background I was an Economics major a long time ago and I don't work in a related field. I have this question that's been nagging me. I hope somebody can answer the questions at the bottom. ...
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### What is the predominant adverse effect between US monetary and fiscal policy interplay?

I can't find the exact issue, but I recall reading in the Economist something to the effect that: QE has been undermined by debt-management policy I assume this to mean as the US finance ministry ...
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### What would be the likely economic consequences of the “trillion dollar coin” idea to eliminate all government debt?

Taken from this question over at politics.se, consider this article by Business Insider which describes a scenario in which the treasury mints a trillion dollar coin to pay off all the debts of the U....
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As far as I inderstand a liquidity trap occurs when increasing the money supply is not able to stimulate the economy because people prefer hoarding the cash rather then investing in debt securities ...
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### On example of “eurodollar” creation

The following example is supposed to be from Milton Friedman, This is supposed to illustrate the creation of "eurodollars", the claim is that there is a supply of 900 extra dollars in the global ...
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### Why is the U.S. economy more responsive to monetary stimulus than the euro zone, Japan, China and other major trading partners?

I've read in a Reuters article that The U.S. economy tends to be more responsive to monetary stimulus than the euro zone, Japan, China and other major trading partners. Is this unambiguously true ...
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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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### 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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### 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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### 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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### 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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### 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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### 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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### 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 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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. ...
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 ...