E short term time deposits held with mfis and central

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an agreed maturity less than 2 years (i.e. short-term time deposits) held with MFIs and central government. M 3: a broad monetary aggregate : M2 plus marketable instruments, money market fund shares and units, and debt securities with a maturity less than 2 years issued by MFIs. Class 5 Monetary Policy
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M 1 ° M 2 ° M 3 but M 0 M 1 Class 5 Monetary Policy
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Money and Economic Activity In fact this relationship between base money and deposit is not stable in Europe (more stable in the US). Δ D / Δ R ±uctuates. Di¢ cult link between the quantity of money Δ R , Δ D and economic activity, even with in±ation ) Most Central banks do not consider quantities of money, but directly in±ation. Class 5 Monetary Policy
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Money and Economic Activity In fact this relationship between base money and deposit is not stable in Europe (more stable in the US). Δ D / Δ R ±uctuates. Di¢ cult link between the quantity of money Δ R , Δ D and economic activity, even with in±ation ) Most Central banks do not consider quantities of money, but directly in±ation. Class 5 Monetary Policy
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An example of Change in Bank Attitude Banks do not use base money to increase lending... Class 5 Monetary Policy
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Money Multiplier is GDP / M 1 Class 5 Monetary Policy
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Monetary Policy Instruments Most central banks do not target a given quantity of money, but instead a given nominal interest rate. Why ? Because the interest rate seems more e/ective on economic activity : it a/ects the borrowing cost of many households and °rms, the price of assets (recall the asset pricing equations), and so on. How does the Central Bank do ? Banks lend base money to each other to satisfy the reserve requirement. This a/ect their cost of borrowing and hence the interest rate they charge to their clients. Class 5 Monetary Policy
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Monetary Policy Instruments Most central banks do not target a given quantity of money, but instead a given nominal interest rate. Why ? Because the interest rate seems more e/ective on economic activity : it a/ects the borrowing cost of many households and °rms, the price of assets (recall the asset pricing equations), and so on. How does the Central Bank do ? Banks lend base money to each other to satisfy the reserve requirement. This a/ect their cost of borrowing and hence the interest rate they charge to their clients. Central Banks intervene on interbank market to a/ect the interest rate charged between banks. Class 5 Monetary Policy
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Anticipated Money Demand Overnight Interest Rate Quantity of Base Money Money Supply The overnight interest rate is called EONIA. Open Market Operations a/ect the supply of base money. 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.
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