5.9 financial markets and central bank online test
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ECON3507Week30Revision.pptxECON3507 Revision
Week 30
Topics
Central Banks in the World: Fed, ECB, BOE.
Functions of central banks.
1. Central Banks
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Central Banks in the World: Fed, ECB, BOE.
Functions of central banks.
Objectives of central banks.
1. Central Banks
Topics
d). The features of a successful central bank
1. Central Banks
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e). Fed
1. Central Banks
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The Price Stability Objective and Monetary Policy Strategy
1. Central Banks
e). ECB: Organizational Structure
The Maastricht Treaty provided the ECB with a legal foundation that makes it highly independent, but
They cannot secure price stability over the long term if fiscal policymakers do not control the rise of public debt nor
Ensure economic stability in the face of bank runs.
When the euro-area crisis began in 2010, the policymakers had to fight to keep the monetary union together.
Addressing the euro-area crisis initially fell to the ECB
ECB instituted a mechanism to purchase government bonds to lower the market interest rates
Offered unlimited resources to euro-area banks
Established common banking supervision through the Single Supervisory Mechanism
Closer to a common resolution framework through the European Stability Mechanism
Single Resolution Mechanism for funding and restructuring insolvent banks
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2. The Central Bank Balance Sheet and the Money Supply Process
1) The Central Bank Balance Sheet
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2. The Central Bank Balance Sheet and the Money Supply Process
2) Changing the Size and Composition of the Balance Sheet
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2. The Central Bank Balance Sheet and the Money Supply Process
3) Money Supply Process: Deposit Expansion
Reserve ratio; deposit expansion multiplier
Limitation on the money multiplier
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3. Monetary Policy (Fed)
1) Conventional MP
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3. Monetary Policy (Fed)
2) Unconventional MP
Forward guidance
Quantitative easing (QE)
Targeted asset purchases (TAP)
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4. Exchange rate Policy
1) Exchange rate policy and monetary
Law of one price
purchasing power parity (PPP)
As long as goods can move freely across international boundaries, one unit of domestic currency should buy the same basket of goods anywhere in the world.
When prices change in one country but not in another, the exchange rate will adjust to reflect the change.
In the long run, changes in the exchange rate are tied to differences in inflation.
The central bank must choose between a fixed exchange rate and an independent inflation policy; it cannot have both.
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Topics
4. Exchange rate Policy
1) Capital Controls and the Policymaker’s Choice
- A country cannot:
Be open to international capital flows
Control its domestic interest rate
Fix its exchange rate
- If a country is willing to forgo participation in international capital markets, it can:
Impose capital controls
Fix its exchange rate
Still use monetary policy to pursue its domestic objectives
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4. Exchange rate Policy
2) Sterilized Intervention
A change in foreign exchange reserves alters the asset side of the central bank’s balance sheet but the domestic monetary base remains unaffected
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4. Exchange rate Policy
3) Cost, benefits, and risks of fixed exchange rates
Fixed exchange rates not only simplify operations for businesses that trade internationally, they also reduce the risk that investors face when they hold foreign stocks and bonds.
In countries that are prone to bouts of high inflation, a fixed exchange rate may be the only way to establish a credible low-inflation policy
Benefits
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Topics
4. Exchange rate Policy
3) Cost, benefits, and risks of fixed exchange rates
Costs
One serious drawback to a fixed exchange rate is that it imports monetary policy.
You must adopt the other country’s interest-rate policy.
A fixed exchange rate policy makes the most sense when the two countries involved have similar macroeconomic fluctuations.
Otherwise, the country with the flexible exchange rate that is in control of monetary policy might be raising interest rates at the same time the other country in going into a recession.
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4. Exchange rate Policy
3) Cost, benefits, and The Danger of Speculative Attacks
Causes of a speculative attack:
Fiscal policy:
If investors begin to think that at current levels, government spending must ultimately increase inflation, they will stop believing that officials can maintain the exchange rate at its fixed level.
Financial instability:
If a country’s banking system is insufficiently capitalized or otherwise unsound, a central bank may face pressure to relax monetary policy to avoid or contain a financial crisis.
If investors doubt that the central bank will keep interest rates high enough for a sufficient time to defend the currency peg, an attack may follow.
Spontaneously:
If enough currency speculators simply decide that a central bank cannot maintain its exchange rate, they will attack.
Spontaneous speculative attacks are like bank runs; they can be contagious.
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5. Money Growth, Money Demand, and Modern Monetary Policy
2) Demand for Money
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6. Output, Inflation, and Monetary Policy
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6. Output, Inflation, and Monetary Policy
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6. Output, Inflation, and Monetary Policy
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6. Output, Inflation, and Monetary Policy
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7. Understanding Business Cycle Fluctuations
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