econ423lec12

econ423lec12 - 7/7/2009 1 MONEY MARKETS MONEY MARKETS JULY...

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Unformatted text preview: 7/7/2009 1 MONEY MARKETS MONEY MARKETS JULY 7 TH , 2009 Lauren Heller Econ 423, Financial Markets The Plan for Today b Choosing a Policy Instrument b Money Markets b Their Purpose and Necessity b Types of Money Market Instruments b Questions Homework #4 Recall from last time b Long run price stability is crucial to the success of any monetary policy. b Central banks use a variety of tools to attain their monetary policy goals, which include: b Price stability and low inflation b Economic growth b Full employment b Financial Market Stability Choosing a Policy Instrument b A policy instrument responds to Central Bank tools to indicate the stance of monetary policy. b What are examples of these tools? b Open Market Operations b Discount Lending b Reserve Requirements Choosing a Policy Instrument b There are two basic types of instruments at the Feds disposal: b Reserve aggregates b Short-term interest rates b Policy instruments can be linked to intermediate targets b Not as directly affected by fed tools, but more closely linked to long run goals b Example - Long-term interest rates Choosing a Policy Instrument b The Fed can only attempt to implement its goals using either reserve aggregates or short- term interest rates. b Not both! b Example - Suppose the Fed believed it could achieve its employment goals by: b Achieving a 3% growth rate in nonborrowed reserves. b Or, by setting the fed funds rate at 4%. b Why not both? 7/7/2009 2 Targeting Nonborrowed Reserves b The central bank expects the demand for reserves to fall at R d *. b But, unexpected deposit fluctuations cause R d to fluctuate between R d and R d b Setting a target for NBR implies that the Fed will lose direct control over the interest rate. R d R d Targeting Nonborrowed Reserves b But, unexpected deposit fluctuations cause R d to fluctuate between R d and R d b To keep NBR constant, interest rates must fluctuate between i ff and i ff b Setting a target for NBR implies that the Fed will lose direct control over the interest rate. Targeting the Federal Funds Rate b What if the Fed decided to target interest rates instead? b As before, the central bank expects the demand for reserves to fall at R d *. b But, unexpected R d fluctuations occur R d R d Targeting the Federal Funds Rate b What if the Fed decided to target interest rates instead? b As before, the central bank expects the demand for reserves to fall at R d *....
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econ423lec12 - 7/7/2009 1 MONEY MARKETS MONEY MARKETS JULY...

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