Econ423-Spr16-Slides_Class_2

Econ423-Spr16-Slides_Class_2 - nontraditionaltools ECON423...

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5/31/2016 1 1 The Federal Reserve System Financial crisis and Fed’s non‐traditional tools Topics in Financial Economics ECON 423 – Spring 2016 Christina P. Tapia, Ph.D. 2 Traditional Tools Operating Targets All three instruments affect the availability or cost of reserves. 1. Open Market Operations 2. Discount Window Operations a. Setting the discount rate b. Administering the discount window 3. Setting the reserve requirement ratios Federal funds rate Discount rate Reserve Requirement Ratio Goals: 1) Price stability, 2) Maximum employment / maximum sustainable growth
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5/31/2016 2 3 Traditional monetary medicine after September 2007 Discount rate lowered from 6.25% to 0.5% (until Dec. 2008) Target for federal funds rate lowered from 5.25% to range of 0 to 0.25% (More recently… when was “liftoff”?)
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5/31/2016 3 5 What are reserves? ‐ Banks are required to hold reserves against deposits that are liabilities on their balance sheets ‐ Reserves may be held in the form of 1) funds held in their account with the Fed or 2) vault cash. ‐ Required reserves – total amount determined by reserve requirement ratio (rr%) times total deposits held at the bank. ‐ How could this be used as a policy tool (as the People’s Bank of China did recently)? Required Reserves (RR) and Excess Reserves (ER) ‐ Required reserves (RR) – total amount determined by reserve requirement ratio (rr%) times total deposits held at the bank. ‐ Banks may also choose to hold excess reserves (ER) beyond the required percentage. Why would banks do this?
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5/31/2016 4 7 Assets Liabilities plus Net Worth ( 1) Total reserves (2) U.S. Treasury securities (3) Bank loans to the public (5) Deposits of the public (6) Discount window loans (7) Net worth a. Required reserves (RR) b. Excess reserves (ER) (4) Tangible assets Simplified Balance Sheet of Banks Demand for reserves from balance sheet of banks TR d = RR + ER Assets Liabilities plus Net Worth 1) Total reserves 2) U.S. Treasury securities and other gov’t securities 3) Bank loans to households and firms 4) Foreign assets 5) Tangible assets 6) Deposits of households and
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