Monetary policy presentation.ppt

MONETARY

POLICY

What is monetary policy?

“…the process by which the

monetary authority of a

country controls the

supply of money.”

What for?

What for?

Expansionary

Increases the total

supply of money in

the economy more

rapidly than usual

Expands the money supply more slowly than usual or even shrinks it.

Contractionary

Problem

• unemployment and deflation

Remedy

• induce an expansion in the supply of money, and therefore spending, by reducing the interest rate

Means

• Buy bonds in the open market

Problem

• inflation

Remedy

• induce a contraction in the supply of money, and therefore spending, by increasing the interest rate

Means

• Sell bonds in the open market

Open Market Operations

The buying and selling of government securities by the Reserve Bank on secondary

markets

OMOs aim to…

manipulate the short term interest rate

manipulate the supply of base money

control the total money supply

How OMOs Work: Buying securities from commercial bank

• Gives up securitiesBank

• Pays the bank

Fed/ CB • Increas

es reserves Bank

How OMOs Work: Buying securities from public

• Gives up securitiesPublic

• Pays

Fed/ CB • Deposit

s in bank

Public

• Increases reserves

Bank

How OMOs Work: Selling securities to commercial bank

• Gives up securities

Fed/CB

• Pays

Bank • Decreases reserves

Bank

How OMOs Work: Selling securities to public

• Gives up securities

Fed/CB

• Pays by check from bank

Public • Decreases reserves

Bank

Understanding The Reserve Requirements

Required reservesA certain fraction of deposits that a depository institution is required to reserve.

Set by the central bank

Affects the size of loan that the bank can offer

Required Reserve and Monetary Policy

Required Reserve and Monetary Policy

Other tool: Discount Rate

The interest rate charged by Federal Reserve Banks to depository institutions on short-term loans.

Discount Rate in Indonesia

Goals of Monetary Policy

Stability in

foreign

exchange

market

Price stability High

employment

Economic growth

Financial markets stabilityInterest rate

stability

Nominal Anchor in Price Stability Goal

Nominal anchor uses a certain nominal variable which ties down the price level.

For example: maintaining an inflation rate between 2% - 4 % might be an anchor.

Time-Inconsistency Problem

This problem arises because policy makers are always tempted to pursue monetary policy that is more expansionary because it would boost economic output.

High Employment

“…does not mean that unemployment is at

zero”

Economic Growth

“…ensuring that resources are not idle”

Stability of Financial Markets

“…crises can interfere with

the main function”

Interest-Rate Stability

“…fluctuations can create

uncertainty in economy”

Stability in Foreign Exchange Market

“…stability makes it easier for businesses to plan ahead”

THANK YOU.