conventional monetary policy

Question 1

monetary policy

Answer 1

any action taken by a countrys monetary authority to steer the local economy

Question 2

when is monetary policy said to be conventinoal

Answer 2

if it is limited to one of the four conventinoal tools AND if OMO are exlcusive to fine tune total amount of reserves held by depository institutions

Question 3

four conventional tools

Answer 3

OMO
-reserve requirements
-discount rate
-interest on reserves

Question 4

what is the main tool the fed used to use

Answer 4

open market operations

Question 5

what are OMO instructed by

Answer 5

FOMC

Question 6

what are OMO

Answer 6

purchases and sales of financial assets by the NY feds trading dek

Question 7

when fed buys treasury bonds

Answer 7

they go up (more of that asset), use cash to pay and creates reserves

Question 8

what happens when a typical bank sells financial assets

Answer 8

when you sell it goes down, sell for money in form of reserves (electronic)

Question 9

what happens whne the fed buys US treasury securities (or any other asset)

Answer 9

it pays for said purchase by creating previously non-existent reserves -> fed grows

Question 10

treasury bills

Answer 10

-bond gov promises to pay in one yr
-go away without fed selling is governemnt paying it off

Question 11

what happens when the fed sells US treasury securities (or any other asset)

Answer 11

exisiting reserves are destroyed -> fed shrinks

Question 12

histroically, vault cash/reserves required to be…

Answer 12

held ahainst a banks outstanding deposits (typically 10%)

Question 13

excess reserves

Answer 13

vault cash in excess of a banks reserve requirements

Question 14

histroically did we have excess reserves

Answer 14

no, so you could restrict banks on deposits they can make

Question 15

bank run

Answer 15

when everyone leaves bank and takes out money

Question 16

why was fed originally founded

Answer 16

to stop bank runs
-relied on private citizen JP morgan to save us
-congress said no more to that

Question 17

why do banks under normal circumstances prefer to borrow reserves from other banks because

Answer 17

it is cheaper (normally) and because borrowing from the fed has historically been viewed as a sign of weakness

Question 18

trade off of IOR

Answer 18

hold reserves with the Fed vs lend them to other banks

Question 19

fed funds are

Answer 19

reserves borrowed from other banks

Question 20

borrowed reserves are

Answer 20

borrowed from the fed

Question 21

uncollateralized

Answer 21

just gotta trust

Question 22

why in Fed 2023 inc interest rates a lot

Answer 22

to try to help price stability b/c price inc a lot

Question 23

fed tries to influence

Answer 23

the economy

Question 24

FFR is

Answer 24

reserves borrowed from bank

Question 25

market rates are determined by

Answer 25

the market

Question 26

commercial loan rates

Answer 26

loan to finance operation

Question 27

market for fed funds

Answer 27

what banks lend to each other overnight

Question 28

are non borrowed reserves fixed

Answer 28

yes

Question 29

are borrowed reserves supplied at the discount rate

Answer 29

yes

Question 30

what is banks fundamental trade off

Answer 30

-lend to fed at IOR -lend to banks above IOR

Question 31

as FFR gets high in market for fed funds

Answer 31

minimize holdings (vertical demand curve)

Question 32

collateral

Answer 32

something you offer to secure a loan

Question 33

profit between ___ and ___ is stronger incentive to lend and not hold in account

Answer 33

FFR; IOR -idea is to hold as little reserves as possible

Question 34

market for fed funds: as the fed increases NBR (via OMO) what happens to the quilibrium FFR rate

Answer 34

FFR falls

Question 35

for market for fed funds (demand): demand for FF is decreasing in FFR because

Answer 35

the opportunity cost of holding reserves rises

Question 36

demand for FF is perfectly eleastic at IOR because

Answer 36

banks are indifferent between lending reserves to other banks or keeping them

Question 37

how fed used to work

Answer 37

fed increases suply of reserves by purchasing financial assets -sell would decrease

Question 38

how do purchase/sale of treasuries by the fed affect the prior graph? where would you expect FFR to beunder the current ample reserves system

Answer 38

today if you shift far right FFR would be lower at what IOR is

Question 39

today fed does what to change interest rates

Answer 39

manipulate IOR to pin interest rates

Question 40

why does fed not have super tight control on bank deposits

Answer 40

b/c they dont create deposits (they can make notes)

Question 41

today the primary interest rate the fed uses to steer the economy is

Answer 41

the federal funds rate

Question 42

how does fed set FFR tody

Answer 42

OMO, IOR, and DR

Question 43

how do OMO, IOR, and RD infleunce FFR

Answer 43

IOR and DR serve as bounds while OMO can pricniplaly be used to find tune FFR between those bounds

Question 44

under the ample reserves system what is the most important conventional tool

Answer 44

IOR

Question 45

conventional monetary policy focused on

Answer 45

short term FFR

Question 46

taylor rules

Answer 46

math equation to help us understand how Fed makes decisions

Question 47

even without consulting the current tealbook can we oredict the feds FFR target

Answer 47

yes, taylor rule exists as a function of output + inflation

Question 48

output and unemplyment are directly

Answer 48

proportional

Question 49

does taylor rule work

Answer 49

yes

Question 50

taylor rule uses what to solve for FFr

Answer 50

output gap (unemployment part) and inflation gap (price stability part) -of dual mandate!

Question 51

respond to (-) output gap by dec

Answer 51

FFR

Question 52

implicaation of taylor rule

Answer 52

raise rates when output and/or inflation are overheating (ie rel. high)

Question 53

why during volvker disinflation was weight of taylor rule 1/2

Answer 53

since volvker was a hawk

Question 54

today what is the weight we use in taylor rule

Answer 54

1 (more dove like)

Question 55

does modified or originial taylor rule follow fed behaviors better

Answer 55

Original

Question 56

what version of taylor rule is used today, why?

Answer 56

modified fed behaviors go into (-), and fed is unwilling to set interest rates at negative levels b/c incentive to convert e-money to cash (garuntees 0% interest rate)

Question 57

what happens if Fed actually went negtive with interest rates

Answer 57

bank runs and that it would encourage people to borrow money

Question 58

does FOMC solve global problems

Answer 58

no, it has five options that are versions of taylor rule. Guided decisions as seen in teal book