Download Monetary Policy - ais

Monetary Policy
 When
the RBA, on the governments behalf,
influences the cash rate and subsequently general
interest rates.
 Main macroeconomic tool to regulate aggregate
demand and economic activity (GDP growth).
 Countercyclical – swing arm of policy
RBA long-term goals
 Financial
 Full
stability
employment
 Increased
prosperity
Inflation Target
 RBA
medium term goal of price stability is
inflation in the 2%-3% range over the course of the
economic cycle.
 WHY?
 Low
inflationary sustainable economic growth
Pre-emptive policy
 The
RBA not only considers the current inflation
rate and the state of the economy it will also
consider all economic indicators that can influence
future inflation
eg
Implementing Monetary Policy
 The
RBA announces its intention to alter the cash
rate. This informs the financial markets that the
RBA is altering its stance.
 The cash rate is the interest rate paid on funds in
the overnight money market. The cash rate is
determined by the supply of money and the
demand for overnight money.
More implementing MP
 Financial
Institutions hold funds in their exchange
settlement accounts to complete daily transactions
between each other and the RBA.
 By manipulating the supply of funds in the
overnight money market the RBA can control the
cash rate.
easing, loosening, expansionary stance
 RBA
purchases second hand CGS from financial
institutions (domestic market operations)
 This increases the supply of funds in the ES
accounts and reduces the cash rate.
 Financial institutions will now have excess
liquidity in ES accounts and will attempt to lend
this money to businesses and the public.
easing, loose, expansionary
 To
attract potential borrowers the financial
institutions will lower general interest rates.
 Investment and Consumption will both increase
causing a rise in aggregate demand
 In the medium- term the economy will expand as
increasing aggregate demand causes growth in
output, employment and national income.
 Expansionary
Monetary Policy is attempting to
increase the rate of growth of the economy and the
money supply by increasing the velocity of
circulation of money
 What is the current cash rate?
 Draw transmission mechanism
tight or contractionary stance
 Explain
how it works and draw Keynesian
diagrams to illustrate the transmission mechanism
 Note: Tight Monetary Policy attempts to slow
down the growth of the economy and the money
supply by slowing down the velocity of circulation
of money
International factors
 Low
international interest rates due to GFC
 2014/Fed Funds Rate is now 0.25%
 Uncertainty on global markets
Effectiveness
 Long
and Variable Lag
 Exchange Rate Effects
 Blunt Instrument
 Wages Growth
 International Shocks
Future Issues
 Strength
of World Growth
 Comparative interest rates
 Exchange rate
 Domestic Capacity Constraints
 Industrial Relations System and wages
growth