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Monetary economics

Monetary economics. monetary policy: tracing the impacts. Monetary policy instruments. Open market operations: purchase of sale of government securities in the market. Discount rate: interest rate charged on loans from the Central Banks to Banks

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Monetary economics

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  1. Monetary economics monetary policy: tracing the impacts

  2. Monetary policy instruments • Open market operations: purchase of sale of government securities in the market. • Discount rate: interest rate charged on loans from the Central Banks to Banks • Required Reserve Ratio: the fraction of bank deposits required to be kept as reserves (i.e. deposits at the Central Bank) • The use of these instruments will affect banks’ reserves – i.e. the portion that can be lent out. • Accordingly, money supply can be affected.

  3. Shift in money supply • An increase in money supply leads to excess money supply at a given level of interest rate. • This prompts economic agents to reallocate money towards bonds, leading to bond price increase or equivalently interest rate reduction .

  4. SHIFT IN LM CURVE

  5. SHIFT IN AGGREGATE DEMAND

  6. the main link The Interest Rate Channel/The Liquidity Effect The effectiveness of this channel depends crucially on the absence of liquidity trap or investment trap

  7. ISSUES • Monetary policy and Liquidity Trap • Monetary policy and Wealth Effect • Monetary targeting framework (interest rate versus monetary aggregates) • Channels of monetary policy: Are there other channels?

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