Econ+310+Winter+2010+Topic+5

Econ+310+Winter+2010+Topic+5 - Economics 310 Money and...

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Unformatted text preview: Economics 310 Money and Banking Topic 5 Monetary Policy 2 Lecture 1 Reading Monetary Policy Chapter 15 3 Lecture 1 Monetary Policy Fed influences the money supply via open market operations Interest rates tend to be the focus of Fed policy decisions How does the Fed influence interest rates directly? How does this influence interest rates more generally? What does this imply for the money supply? 4 Lecture 1 The Federal Funds Market The Fed doesnt try directly to manipulate every interest rate Targets one interest rate specifically The Federal Funds Rate Relies on the relationships between interest rates to propagate these changes through the broader market 5 Lecture 1 The Federal Funds Market This is literally the market for reserves Reserves can be held, or may be lent or borrowed overnight on the Federal Funds market Federal Funds Rate is the price paid for reserves Demand comes from the banks Reserve requirements Demand for excess reserves Supply determined by the Fed itself OMOs alter the quantity of reserves available in the market Discount and other loans made to banks 6 Lecture 1 The Federal Funds Market Demand: Banks demand reserves for two reasons: Meet reserve requirements this is obviously independent of the interest rate in this market Hold excess reserves as a form of insurance As these are discretionary reserves, they will respond to fluctuations in the interest rate (specifically to fluctuations in the federal funds market) Fed offers interest on reserves (since Oct 2008)...
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This note was uploaded on 09/28/2010 for the course ECON 310 taught by Professor Hogan during the Winter '08 term at University of Michigan.

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Econ+310+Winter+2010+Topic+5 - Economics 310 Money and...

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