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Chapter Eight THE CONDUCT OF MONETARY POLICY: TOOLS, GOALS, AND TARGETS Copyright © 2000 Addison Wesley Longman Slide #8-1 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 Government Currency in circulation security Discount loans reserve 有賺利息 不支息 Monetary Base = Currency + Reserves Open Market Purchase from Bank The Banking System Assets Securities - $100 Reserves + $100 Liabilities Copyright © 2000 Addison Wesley Longman The Fed Assets Securities + $100 Liabilities Reserves + $100 Result: R $100, MB $100 Slide #8-2 The Federal Reserve Balance Sheet Open Market Purchase from Public Public Assets Liabilities Securities - $100 Deposits + $100 Banking System Assets Liabilities Reserves Deposits + $100 + $100 Copyright © 2000 Addison Wesley Longman The Fed Assets Liabilities Securities Reserves + $100 +$100 Result: R $100, MB $100 Slide #8-3 The Federal Reserve Balance Sheet Discount Loans Banking System Assets Reserves + $100 Liabilities Discount loan + $100 The Fed Assets Discount loan + $100 Liabilities Reserves + $100 Result: R $100, MB $100 Copyright © 2000 Addison Wesley Longman Slide #8-4 Market for Reserves and the Fed Funds Rate 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 Copyright © 2000 Addison Wesley Longman 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 Slide #8-5 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 Copyright © 2000 Addison Wesley Longman 1. Open market purchase, Rs shifts to right and iff 2. id , DL , Rs shifts to right and iff Slide #8-6 Response to Change in Required Reserves 1. RR , Rd shifts to right, iff Copyright © 2000 Addison Wesley Longman Slide #8-7 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 Copyright © 2000 Addison Wesley Longman Slide #8-8 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 有 給愈有severe liquidity 需求之銀行 代 2. Seasonal Credit 價 3. Extended Credit: more difficult to obtain Lender of Last Resort Function 也 1. To prevent banking panics: FDIC fund not big enough 有 Examples: Continental Illinois and Franklin National Banks 代 價 2. To prevent nonbank financial panics Example: 1987 stock market crash 若央行決定進行open market sales (緊縮貨幣政策) 之後 Announcement Effect ,又宣布將提高discount rate,則外界可能解釋為加強 ff, 1. Problem: False signals 緊縮效果。但事實可能不是如此。因為OMS會使得i 若央行不及時提高discount rate,則銀行可能借discount Copyright © 2000 Addison Wesley Longman loan,再以高的 iff貸放出去。 Slide #8-9 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 Copyright © 2000 Addison Wesley Longman Slide #8-10 Goals of Monetary Policy Goals Structural Frictional 1. High Employment Natural rate of 2. Economic Growth 高就業、高投資+高儲蓄 Supply-side economics 3. Price Stability 透過減稅 4. Interest Rate Stability 5. Financial Market Stability 6. Foreign Exchange Market Stability Goals often in conflict Copyright © 2000 Addison Wesley Longman 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 Slide #8-11 。 Central Bank Strategy NBR=total reserve-borrowed reserve Discount loan MB- borrowed reserve Or T-bill rate Copyright © 2000 Addison Wesley Longman Slide #8-12 Money Supply Target Monetary aggregate reserve aggregate 1. Md fluctuates between Md' and Md'' 2. With Mtarget at M*, i fluctuates between i ' and i '' Copyright © 2000 Addison Wesley Longman Slide #8-13 Interest Rate Target 1. Md fluctuates between Md' and Md'' 2. To set itarget at i*, Ms fluctuates between M ' and M '’ Copyright © 2000 Addison Wesley Longman Slide #8-14 Criteria for Choosing Targets Criteria for Intermediate Targets and accurate measurement,似乎利率比 1. Measurability quick monetary aggregate較佳,但有名目利率的問題 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 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. Copyright © 2000 Addison Wesley Longman Slide #8-15 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 To lower the inflation 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 Copyright © 2000 Addison Wesley Longman 當時央行認為bank failure只是大恐慌 的產物,而非原因之一。 Slide #8-16 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% 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 2. Fed-Treasury Accord in March 1951 以Money Market Conditions: 1950s and 60s 為目標 1. Free reserves = ER - DL 為何要減去? 當FR, 表示money market condition越寬鬆 2. Interest rates 所以應作open market sales,以降低free Short-term Copyright © 2000 Addison Wesley Longman reserve Slide #8-17 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 I s 控制利率為目標,就會使Ms變來變去 2. Procyclical M M New Operating Procedures: 1979-82 所以這段期間iff變化加大 1. Deemphasis on fed funds rate ,但Ms變化卻也加大,原 2. Nonborrowed reserves operating target 因是央行並未認真執行。 3. Fed still using interest rates to affect economy and inflation Deemphasis of Monetary Aggregates: 1982 -Early 1990s 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 1. Borrowed Reserves (DL) operating target Copyright © 2000 Addison Wesley Longman 所以以控制DL為目 標,就會使利率較穩 定 Slide #8-18 Federal Funds Rate and Money Growth Before and After October 1979 Copyright © 2000 Addison Wesley Longman Slide #8-19 History of Fed Policy Procedures Fed Funds Targeting Again:1990’s and beyond 1. Fed funds target now announced International Considerations 以提升美國出口 1. M in 1985 to lower exchange rate, M in 1987 to raise it 2. International policy coordination Copyright © 2000 Addison Wesley Longman Slide #8-20 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) Copyright © 2000 Addison Wesley Longman Slide #8-21 Monetary Targeting Abroad Japan 定期公告 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 Copyright © 2000 Addison Wesley Longman Slide #8-22 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 Copyright © 2000 Addison Wesley Longman Slide #8-23 Using a Fed Watcher Fed watcher predicts monetary tightening, i 1. 2. Acquire funds at current low i Buy $ in FX market Fed watcher predict monetary loosening, i 1. 2. 3. Make loans now at high i Buy bonds, price rise in future Sell $ in FX market Copyright © 2000 Addison Wesley Longman Slide #8-24