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Howeverthe cbcannotsettherealinterestrate

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Unformatted text preview: ormation to determine the best settings for the monetary policy. Demonstrated success in US. ► Disadvantages of Implicit Nominal Anchor: Lack of transparency: It creates uncertainty and unnecessary volatility in the financial markets. Lack of accountability: No predetermined criteria for judging the success of the FED. Success of the policy is highly dependent on the preferences, skills and trustworthiness of individuals in charge of the central bank. 19 Choosing the Policy Instrument ► Policy Instrument (Operating Instrument): is a variable that respond to CB’s tool and indicates the stance of the monetary policy (easy­tight). Reserve aggregates: total reserves, non­borrowed reserves, monetary base etc. Interest rates: short term interest rates. ► Intermediate Target: these stand in between the policy instrument and the monetary policy goals and are not directly affected by the tools of monetary policy but more closely linked with the goals. M2, M3 Long­term interest rates 20 Policy Instrument Intermediate Target Monetary Policy Goals For Example: O/N Rate Long term interest rate Price Stability 21 Targeting Non...
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