8 - Mon Policy and Int Rates 1

8 - Mon Policy and Int Rates 1 - 10/8/2008 Lecture 8 TOPIC...

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10/8/2008 1 © HB, 2008 Lecture 8 TOPIC 5 Monetary Policy and Interest Rates 1 (Monetary Policy) © HB, 2008 Administration r Path forward Study technique » Reading the book is essential » Several learning resources » Think! Content » Monetary policy » Interest rates » Options and futures markets Lectures and tutorials » Consider the benefits r What’s happened lately in the markets? Keep up with the financial news © HB, 2008 Monetary policy r Big Question or Idea How does the central bank help manage inflation, financial system stability and economic growth? r Key Questions What is monetary policy? What is the role of the central bank? How does it work? Why is it needed? Why is it important?
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10/8/2008 2 © HB, 2008 r What is monetary policy? Manipulation of the money supply » Deliberate actions of central bank r By buying and selling government securities and foreign currency » To achieve certain objectives r Economic growth, financial system stability and control inflation Contrast with fiscal policy » Government actions to change taxes and government expenditure © HB, 2008 r How is monetary policy conducted? Central banks » Reserve Bank of Australia (RBA) » RBA Governor and Board r Visit the web site Objectives » Ultimate target of monetary policy focuses on inflation » Target inflation range of 2-3% pa, medium term What can it do and how? » Set official short-term interest rate r It is a target interest rate » By affecting the money supply © HB, 2008 Country Central Bank Key Rate Chair Current Rate Australia Reserve Bank of Australia Founded: 1959 Cash rate Glenn Stevens 6.0% United States Federal Reserve (Fed) Founded: 1913 Fed funds rate Ben Bernanke 2.0% United Kingdom Bank of England Founded: 1694 Base rate Mervyn King Japan Bank of Japan Benchmark rate 0.5% Rate used to conduct policy These rates change!!
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10/8/2008 3 © HB, 2008 r Inflation “Inflation is like toothpaste. Once it is out of the tube, it is hard to get it back again.” » Karl Otto Pöhl, former president of German Bundesbank, quoted in The Economist , October 22, 2005: 14 Economics course – what is inflation, why is it important, how is it controlled r Inflation targeting A system in which the central bank tries to achieve an explicit target for the inflation rate within some period. » In Australia, inflation rate in a target band between 2 to 3% per year over the medium term cycle Inflation targeting r RBA’s balance sheet To understand the monetary policy actions of the RBA, we need to understand its balance sheet. What is a balance sheet?
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This note was uploaded on 10/19/2011 for the course BANK 1005 taught by Professor Hb during the Three '09 term at South Australia.

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8 - Mon Policy and Int Rates 1 - 10/8/2008 Lecture 8 TOPIC...

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