Class 5 monetary policy monetary policy instruments

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Class 5 Monetary Policy
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Monetary Policy Instruments European Central Bank de°nes two additional interest rates. The °rst one is a deposit rate. Banks can make some deposit at the central banks at a given (low) interest rate. The interbank interest rate can not be lower than the central bank deposit rate. The second one is a borrowing rate. Banks can borrow from the Central bank at a high (penalty) rate. The interbank interest rate can not be higher than this borrowing rate. Class 5 Monetary Policy
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Anticipated Money Demand Overnight Interest Rate Quantity of Base Money Borrowing Rate Lending Rate Class 5 Monetary Policy
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Class 5 Monetary Policy
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Class 5 Monetary Policy
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Central banks a/ect EONIA (overnight). Banks lend money to each other for longer period : EURIBOR = Interest rate on loans between banks for longer period (for instance 3 months). EURIBOR is important for the borrowing cost of banks, and hence for monetary policy. Class 5 Monetary Policy
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Central banks a/ect EONIA (overnight). Banks lend money to each other for longer period : EURIBOR = Interest rate on loans between banks for longer period (for instance 3 months). EURIBOR is important for the borrowing cost of banks, and hence for monetary policy. Usually, movements in EONIA translates in movement in EURIBOR Class 5 Monetary Policy
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Central banks a/ect EONIA (overnight). Banks lend money to each other for longer period : EURIBOR = Interest rate on loans between banks for longer period (for instance 3 months). EURIBOR is important for the borrowing cost of banks, and hence for monetary policy. Usually, movements in EONIA translates in movement in EURIBOR Not the Case in time of crisis. Class 5 Monetary Policy
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The E/ects of Monetary Policy 1 First e/ects due to sticky price (like IS-LM). Decrease in the short-run nominal rate a/ects the short-run real interest rate, and generally the medium-run real interest rate, relevant for borrowers. Class 5 Monetary Policy
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The E/ects of Monetary Policy 1 First e/ects due to sticky price (like IS-LM). Decrease in the short-run nominal rate a/ects the short-run real interest rate, and generally the medium-run real interest rate, relevant for borrowers. 2 r &) Asset Prices % ( Recall the basic formula) ) Agents feel richer and consume more (Wealth e/ect) Class 5 Monetary Policy
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The E/ects of Monetary Policy 1 First e/ects due to sticky price (like IS-LM). Decrease in the short-run nominal rate a/ects the short-run real interest rate, and generally the medium-run real interest rate, relevant for borrowers. 2 r &) Asset Prices % ( Recall the basic formula) ) Agents feel richer and consume more (Wealth e/ect) 3 r &) It is cheaper for bank to borrow money to lend ) Increase in credit (credit view) Class 5 Monetary Policy
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The E/ect of Monetary Policy Decrease in the nominal interest rate is associated with an increase in the money in circulation ) In±ation increases, the real interest rate decreases even more.
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