ECO2115chapter16_2017 part I.pptx - Tools of Monetary...

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International Financial Management
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Chapter 7 / Exercise 01
International Financial Management
Madura
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ECO2115 Tools of Monetary Policy (part I) Prof. Karnizova
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International Financial Management
The document you are viewing contains questions related to this textbook.
Chapter 7 / Exercise 01
International Financial Management
Madura
Expert Verified
Learning Objectives 1. Characterize the framework for the implementation of monetary policy in Canada 2. Explain the market for reserves and how changes in monetary policy affect overnight interest rates 3. Define the difference between conventional and unconventional monetary policy tools
Overview of the monetary policy process Policy Goals Intermediate Targets Policy Instruments (Operating Targets) Tools of the Central Bank
Monetary policy tools are variables that are under direct control of a central bank Conventional monetary policy tools are aimed at influencing the short-term interest rates, thereby influencing the economy via the interest rate transmission channel. Open market operations Bank lending The interest rate on reserves Reserve requirements Monetary policy tools
How the Bank of Canada Keeps the Rate of Inflation from Falling Below the Target Range
How the Bank of Canada Keeps the Rate of Inflation from Moving Above the Target Range
Unconventional Monetary Policy Tools during the Global Financial Crisis In normal times, conventional policy tools are enough In time of financial crisis, they are no longer effective The financial system seizes up to such an extent that it becomes unable to allocate capital The negative shock to the economy can lead to the zero-lower-bound problem , where the central bank is unable to lower short-term interest rates Central banks therefore need non-interest-rate tools known as nonconventional monetary policy tools
Uncoventional Monetary Policy Large-scale asset purchases Quantitative easing Forward guidance and the commitment to future policy actions Negative nominal interest rates
The Large Value Transfer System (LVTS) The Large Value Transfer System (LVTS) Electronic, real-time net settlement network Designed to provide immediate finality and settlement to time-critical transactions The LVTS participants know in real time their large-value, wholesale transactions (over $50,000) Transactions account for < 1% of the total number of transactions but 94% of the value The LVTS uses multilateral netting Only the net credit or debit position of each participant vis- à-vis all other participants is calculated for settlement
Systemic Risk and the LVTS The risk to the entire payments system due to the inability of one financial institution to fulfill its payment obligations The LVTS helps eliminate systemic risk Participants can make a payment only if: they have positive settlement balances in their accounts with the Bank of Canada, posted collateral (such as T-bills and bonds), or explicit lines of credit with other LVTS participants
Non-LVTS (ACSS) Transactions These are non-LVTS (paper-based) payment items, such as cheques These items are cleared through the Automated Clearing Settlement System (ACSS), an electronic payments system also operated by the CPA

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