Chapter Eight

1. Chapter Eight THE CONDUCT OF MONETARY POLICY: TOOLS, GOALS, AND TARGETS

2. Government security Discount loans Currency in circulation reserve 有賺利息 不支息 The Federal Reserve Balance Sheet Fed 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 • 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

3. The Federal Reserve Balance Sheet • Open Market Purchase from Public • Public The Fed • Assets Liabilities Assets Liabilities • Securities Securities Reserves • - $100 + $100 +$100 • Deposits • + $100 • Banking System • Assets Liabilities • Reserves Deposits • + $100 + $100 Result: R $100, MB $100

4. The Federal Reserve Balance Sheet • Discount Loans • Banking System The Fed • Assets Liabilities Assets Liabilities • Reserves Discount Discount Reserves • + $100 loan + $100 loan + $100 + $100 • Result: R $100, MB $100

5. 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 Reserve = required reserve + excess reserve 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

6. Response to Open Market Operation or Change in Discount Rate ∴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 • 1. Open market purchase, Rs shifts to right and iff • 2. id, DL , Rs shifts to right and iff

7. Response to Change in Required Reserves • 1. RR , Rd shifts to right, iff

8. Tools of Monetary Policy • Open Market Operations • 1. Dynamic: • Meant to change Reserves • 2. Defensive: • Meant to offset other factors affecting Reserves, typically uses repos and reverse repos • Advantages of Open Market Operations • 1. Fed has complete control • 2. Flexible and precise • 3. Easily reversed: effect is reversed on the day the agreement matures • 4. Implemented quickly

9. 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 有 代 價 給愈有severe liquidity 需求之銀行 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。

10. Reserve Requirements • Advantages • 1. Powerful effect • Disadvantages • 1. 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

11. Goals of Monetary Policy Structural Frictional Natural rate of • Goals • 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 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。

12. Central Bank Strategy NBR=total reserve-borrowed reserve Discount loan MB- borrowed reserve Or T-bill rate

13. Money Supply Target Monetary aggregate reserve aggregate • 1. Md fluctuates between Md' and Md'' • 2. With M-target at M*, i fluctuates between i ' and i ''

14. Interest Rate Target • 1. Md fluctuates between Md' and Md'' • 2. To set i-target at i*, Ms fluctuates between M ' and M '’

15. Criteria for Choosing Targets quick and accurate measurement，似乎利率比monetary aggregate較佳，但有名目利率的問題 • Criteria for Intermediate Targets • 1. Measurability • 2. 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 1and 2. But for 3, if monetary aggregate is used as the intermediate target then reserve aggregate is better used as the operating target.

16. History of Fed Policy Procedures 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 • Early 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 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。

17. History of Fed Policy Procedures • Pegging of Interest Rates: 1942-51 • 1. 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 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 為何要減去? 當FR, 表示money market condition越寬鬆所以應作open market sales，以降低free reserve Short-term

18. History of Fed Policy Procedures Intermediate 但事實上with broad band • Targeting Monetary Aggregates: 1970s • 1. Fed funds rate as operating target with narrow band • 2. Procyclical Ms • New Operating Procedures: 1979-82 • 1. 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 I 控制利率為目標，就會使Ms變來變去 M 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

19. Federal Funds Rate and Money Growth Before and After October 1979

20. History of Fed Policy Procedures • Fed Funds Targeting Again:1990’s and beyond • 1. Fed funds target now announced • International Considerations • 1. M in 1985 to lower exchange rate, M in 1987 to raise it • 2. International policy coordination 以提升美國出口

21. Monetary Targeting Abroad • United Kingdom 1. Targets M3 and later M0 2. Problems of M as monetary indicator • Canada 1. Targets M1 till 1982, then abandons it 2. 1988: declining π targets, M2 as guide • Germany 1. 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)

22. Monetary Targeting Abroad • Japan 1. 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 定期公告

23. Inflation Targeting • Lessons from Monetary Targeting • 1. 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., Canada • 1. Announcement of numerical π goal • 2. Commitment to price stability • 3. Communication with "Inflation Report" • Lessons from Inflation Targeting • 1. 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

24. 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