Copyright © 2000 Addison Wesley Longman Slide #8-1 Chapter Eight THE CONDUCT OF MONETARY POLICY: TOOLS, GOALS, AND TARGETS.

Copyright © 2000 Addison Wesley Longman Slide #8-1

Chapter Eight

THE CONDUCT OF MONETARY POLICY: TOOLS, GOALS, AND

TARGETS


The Federal Reserve Balance Sheet

Monetary Base = Currency + Reserves

Open Market Purchase from Bank The Banking System The Fed

Assets Liabilities Assets Liabilities

Securities Securities Reserves

- $100 + $100 + $100 Reserves

+ $100 Result: R $100, MB $100

Government securityDiscount loans

Currency in circulation

reserve有賺利息不支息

Note: reserve 包含銀行在央行的存款及銀行持有的 currency ， CIC 不包含銀行持的 currency

Fed


Open Market Purchase from Public Public The Fed


Securities Securities Reserves

- $100 + $100 +$100

Deposits

+ $100

Banking System

Assets Liabilities

Reserves Deposits

+ $100 + $100 Result: R $100, MB $100




Discount Loans Banking System The Fed


Reserves Discount Discount Reserves

+ $100 loan + $100 loan + $100 + $100

Result: R $100, MB $100


Market for Reserves and the Fed Funds Rate

1. Demand curve slopes down because iff , ER and Rd up

2. Supply curve slopes up because iff , DL , Rs

3. Equilibrium iff where Rd = Rs

iff opportunity cost of holding ER

iff 銀行較願意向央行借DL 再拆放給同業，以賺取較高的 iff

Reserve = required reserve + excess reserve


Response to Open Market Operation or Change in Discount Rate

1. Open market purchase, Rs shifts to right and iff

2. id , DL , Rs shifts to right and iff

∴ 本張和上張投影片之結論：iff 代表央採擴張貨幣政策

iff 代表央行採緊縮貨幣政策


Response to Change in Required Reserves

1. RR , Rd shifts to right, iff


Tools of Monetary PolicyOpen Market Operations1. Dynamic:

Meant to change Reserves

2. Defensive: Meant to offset other factors affecting Reserves, typically uses repos and reverse repos

Advantages of Open Market Operations1. Fed has complete control2. Flexible and precise3. Easily reversed: effect is reversed on the day the agreement matures4. Implemented quickly


Discount Loans Fed affects discount loan thru price (discount rate) and quantity

控制下面 3 種 quantity

3 Types

1. Adjustment Credit: easily obtained

2. Seasonal Credit

3. Extended Credit: more difficult to obtain

Lender of Last Resort Function

1. To prevent banking panics: FDIC fund not big enough

Examples: Continental Illinois and Franklin National Banks

2. To prevent nonbank financial panics

Example: 1987 stock market crash

Announcement Effect

1. Problem: False signals

給愈有 severe liquidity 需求之銀行有代價

也有代價

若央行決定進行 open market sales ( 緊縮貨幣政策 ) 之後，又宣布將提高 discount rate ，則外界可能解釋為加強緊縮效果。但事實可能不是如此。因為 OMS 會使得iff ，若央行不及時提高 discount rate ，則銀行可能借discount loan ，再以高的 iff 貸放出去。


Reserve Requirements

Advantages1. Powerful effect

Disadvantages1. Small changes have very large effect on

Ms

2. Raising causes liquidity problems for banks

3. Frequent changes cause uncertainty for banks

4. Tax on banks


Goals of Monetary PolicyGoals

1. High Employment

2. Economic Growth

3. Price Stability

4. Interest Rate Stability

5. Financial Market Stability

6. Foreign Exchange Market Stability

Goals often in conflict

StructuralFrictionalNatural rate of

高就業、高投資 + 高儲蓄Supply-side economics透過減稅

當景氣擴張、失業率降低時，常會造成利率上升，通膨也上升。此時央行若為了控制利率穩定而採降息措施，則可能導致景氣過熱，通膨更高。但若為了控制物價穩定，而讓利率繼續上升，則可能導致短期內失業率上升。


Central Bank Strategy

NBR=total reserve-borrowed reserveDiscount loan

MB- borrowed reserve

Or T-bill rate


Money Supply Target

1. Md fluctuates between Md' and Md''

2. With M-target at M*, i fluctuates between i ' and i ''

Monetary aggregate reserve aggregate


Interest Rate Target1. Md

fluctuates between Md' and Md''

2. To set i-target at i*, Ms fluctuates between M ' and M '’


Criteria for Choosing Targets

Criteria for Intermediate Targets1. Measurability2. Controllability 利率比 monetary aggregate 較佳，但有名目利率的問

題3. Ability to predictably affect goals: open for debate

Interest rates aren't clearly better than Ms on criteria 1 and 2 because hard to measure and control real interest rates

Criteria for Operating Targets Same criteria as above Reserve aggregates and interest rates about equal on criteria

1 and 2. But for 3, if monetary aggregate is used as the intermediate target then reserve aggregate is better used as the operating target.

quick and accurate measurement ，似乎利率比monetary aggregate 較佳，但有名目利率的問題


History of Fed Policy ProceduresEarly Years: Discounting as Primary Tool

1. Real bills doctrine

2. Rise in discount rates in 1920: recession 1920-21

Discovery of Open Market Operations

1. Made discovery when purchased bonds to get income in

1920s

Great Depression

1. Failure to prevent bank failures

2. Result: sharp drop in Ms

只要銀行拿著貸款客戶開立的票據來央行 discount window ，央行就會借錢給該銀行，因為這些錢會是 for production use

To lower the inflation

當時央行認為 bank failure 只是大恐慌的產物，而非原因之一。


Pegging of Interest Rates: 1942-511. To help finance war, T-bill at 3/8%, T-bond at

2 1/2%2. Fed-Treasury Accord in March 1951

以 Money Market Conditions: 1950s and 60s 1. Free reserves = ER - DL

2. Interest rates

History of Fed Policy Procedures

每當利率有上升壓力時， Fed 就作 OMP ，使利率不會上升，但會導致 M 及通膨

為目標

當 FR, 表示 money market condition 越寬鬆所以應作 open market sales ，以降低 free reserve

為何要減去 ?

Short-term



Targeting Monetary Aggregates: 1970s1. Fed funds rate as operating target with narrow band

2. Procyclical Ms

New Operating Procedures: 1979-821. Deemphasis on fed funds rate

2. Nonborrowed reserves operating target

3. Fed still using interest rates to affect economy and inflation

Deemphasis of Monetary Aggregates: 1982 -Early 1990s

1. Borrowed Reserves (DL) operating target

Intermediate 但事實上 with broad band

控制利率為目標，就會使 Ms 變來變去M

I

所以這段期間 iff 變化加大，但 Ms 變化卻也加大，原因是央行並未認真執行。

當景氣擴張時，利率上升，則銀行會較有意願來借 DL ，這時央行為了控制 DL ，就必須作 OMP ，使利率下降所以以控制 DL 為目

標，就會使利率較穩定


Federal Funds Rate and Money Growth Before and After October 1979


Fed Funds Targeting Again:1990’s and beyond

1. Fed funds target now announced

International Considerations1. M in 1985 to lower exchange rate, M in 1987 to

raise it

2. International policy coordination


以提升美國出口


Monetary Targeting Abroad United Kingdom

1. Targets M3 and later M0

2. Problems of M as monetary indicator

Canada1. Targets M1 till 1982, then abandons it

2. 1988: declining π targets, M2 as guide

Germany1. Targets central bank money, then M3 in 1988

2. Allows growth outside target for 2-3 years, but then reverses overshoots

3. 1990s: dilemma of restrain π, but keep exchange rate in EMS (European Monetary System)


Japan1. Forecasts M2 + CDs

2. Innovation and deregulation makes less useful as monetary indicator

3. High money growth 1987-89: "bubble economy", then tight money policy

Monetary Targeting Abroad

定期公告


Inflation Targeting

Lessons from Monetary Targeting1. Success requires correcting overshoots

2. Operating procedures not critical

3. Breakdown of relationship between M and goals made M-targeting untenable: Led to inflation targeting

Inflation Targeting: New Zealand, U.K., Canada1. Announcement of numerical π goal

2. Commitment to price stability

3. Communication with "Inflation Report"

Lessons from Inflation Targeting1. Decline in π still led to output loss

2. Worked to keep π low

3. Kept π in public eye: reduced political pressures for inflationary policy


Using a Fed Watcher

Fed watcher predicts monetary tightening, i 1. Acquire funds at current low i

2. Buy $ in FX market

Fed watcher predict monetary loosening, i 1. Make loans now at high i

2. Buy bonds, price rise in future

3. Sell $ in FX market

Copyright © 2000 Addison Wesley Longman Slide #8-1 Chapter Eight THE CONDUCT OF MONETARY POLICY: TOOLS, GOALS, AND TARGETS.

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