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Economic policy > Monetary Policy > Flashcards

Monetary Policy Flashcards

1
Q

Wide aim on monetarily policy

A

Financial stability and inflation kept at 2%

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2
Q

Narrow aim of monetary policy

A

Keep inflation at 2%

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3
Q

Two core purposes of B of E

A

Monetary stability and financial stability

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4
Q

Costs of inflation

A

Menu costs
Shoe leather costs
Uncertainty and confusion
Redistribution of income from poor to rich
Redistribution of income from lenders to borrowers
Increase interest rates
Fiscal drag - tax brackets don’t keep up with cpi

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5
Q

Monetary stability aim

A

Keep stable prices (2% inflation) and confidence in currency

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6
Q

Financial stability aim

A

Supervise financial markets

Reduce financial risk in system

Act as a lender

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7
Q

What does b of e look after

A

Financial system as a whole

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8
Q

What does FSA look after

A

Individual banks and financial organisations

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9
Q

why was FSA disbanded and what did it get split into

A

failed to adapt to GFC

split into PRA , FPC = organisations of B of E
and also independent organisation known as FCA

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10
Q

What did
financial position executive board do

A

Give guidance on financial stability

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11
Q

Northern rock collapse

A

Bank struggling - so b of e lent money to bank in form of emergency loan but made this information public which was the law - but this caused people get frightened and take money out which lead to bank becoming bankrupt

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12
Q

What is FPC

A

B of e main institution for financial stability q

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13
Q

Aim of FPC

A

Decrease financial system risk and increase resilience of uk financial system

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14
Q

Who’s in FPC

A

Internal and external members who provide expertise in niche areas or the market

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15
Q

Why do FPC and MPC have some cross membership

A

To increase consistency between financial regs and momentary policy

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16
Q

FPC instruments

A

Countecyclical buffer rate
Sectoral capital requirements
Leveraage ratio requirement
Loan to value, debt to income and interest to cover limits

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17
Q

What is countercyclical buffer rate

A

International 8 %
Uk 1% but moving to 2%

Capital required by each bank in case of negative economy shock

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18
Q

Sectoral capital requirements

A

When lending to riskier sectors , banks are required to hold additional capital against i t

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19
Q

Leverage ratio requirements

A

Limits exposure relative to their capital base

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20
Q

Loan to value , debt to income and interest to cover limits

A

Limits on mortgages in order to contain risks from housing markets

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21
Q

Stress testing

A

B of e annual stress test

Able to assess banks resilience and make sure they have enough capital to withstand shocks

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22
Q

Ring fencing

A

Segregates retail banking from investment activities

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23
Q

PRA 3 aims

A

Promote safety of firms
Facilitate effective competition
Secure protection for policy holders

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24
Q

What is PRA apart of

A

B of e

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25
Q

PRC members

A

Internal and external members q where external members are majority

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26
Q

FCA part of b of e

A

No

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27
Q

What two questions do fca ask

A

Are customers getting a fair price

Are financial institutions abusing market power

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28
Q

Principles of monetary policy

A

Price s stability at 2%
Openness
accountability
credibility
Flexibility

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29
Q

What is bad for economy in regards to inflation

A

If inflation too high or too low

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30
Q

What happens when inflation not between 1 and 3 percent

A

Governor must explain to chancelllor why its not in target range and what they plan to do in order to get inflation back at 2 percent

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31
Q

What is cost of bring down inflation in short run

A

Increase bank rate = increase cost of borrowing so less borrowing and less investment = recession

32
Q

What does MPC make decisions on

A

Interest rates and quantitative easing

33
Q

Why is corridnation between fpc and MPC difficult

A

Increase bank rates causes a decline in financial stability

34
Q

Who in MPC

A

Internal and external members plus non voting member from treasury to inform on latest fiscal updates

35
Q

Bank rate ta the moment and why

A

4.5% in order to get inflation down to 4 % by the end of 2023

36
Q

What is momentary policy report

A

Reports on financial state of uk and provides forecasts for growth and inflation in the uk

Increases openness of Bank of England

37
Q

When was b of e made operationally independent

A

1997

38
Q

Pros to operational independence

A

MPC has more expertise than gov

B of e more protected against pressure from gov
Stops potentially buying votes by gov

39
Q

Limitation B of e operational independence

A

In extreme events gov can instruct b of e on policy

Price stability defined by gov at 2 percent

MPC required to support gov policy

40
Q

What are the 3 conventional instruments b of e uses to implement MPC decisions

A

Operational standing lending / deposit facility

Short term repo

Long term repo

41
Q

What are the 4 unconventional instruments b of e uses to implement MPC decisions

A

Discount window facility
Contingent claim repo
QE
Forward guidance

42
Q

Operational standing lending/deposit facility

A

Available over night and on demand

Normally lending rate 25 points higher than bank rate
Deposit rate 25 points lower than bank rate

Helps get market rates closer to bank rates and helps banks manage unexpected payments problems

43
Q

Short term repo

A

Banks can lend highly liquid assets out for 1 week periods against level A collateral

Helps keep short term interest rates at bank rates by ensuring banks don’t need to pay above bank rate for money reserves

44
Q

Positive of short term bank repo

A

Injects central bank money into the economy for short amount of time

45
Q

Long term repo

A

Allow banks to borrow central bank money for 6 month periods against broad range of collateral

46
Q

How are long term repo bids submitted

A

Banks submit big in terms of spread to bank rate

Higher the spread - more likely to get bid accepted

47
Q

Discount window facility

A

On demand facility aimed at banks experiencing liquidity shocks

Borrow form b of e highly liquid assets for less liquid collateral - high interest payments to incentives quick repayment

48
Q

When use Contingent term repo facility

A

B of e can activate when there’s market wide stress

49
Q

What is contingent term repo facility

A

Allow b of e to increase liquidity of banks for full range of collateral - very flexible

50
Q

What does b of e lend against

A

Collateral

51
Q

Why collateral

A

Bc if party fails to repay then they can sell collateral to make good of any loss

52
Q

How does b of e protect itself from falling price of collateral

A

Lend less than the collateral is worth

53
Q

Levels of collateral

A

A high quality highly liquid
B
C less liquid less quality

54
Q

When did QE start

A

2009

55
Q

Why QE

A

Increase money supply into economy to bring down interest rates and encourage people to spend

56
Q

How does QE work

A

B of e creates new money and buys gilts from private corperations

Interest rate on money low so they invest new money into other financial assets which increases demand on finaancial assets so supply increases thus so interest rates decrease which increasing borrowing and investment so spending increase

57
Q

What does b of e do with interest retuned from gilts

A

Gives it to the gov

58
Q

Pros of QE

A

Increase money supply

Increases demand and production
Asset purschase targets prevents gov from inflating debt away and QE being abused

Ensures monetary policy effective and decrease disruption to financial market s

59
Q

Cons of QE

A

Initial effect caused increase in gdp but later rounds have had no effect

Form of government finance which can severely worsen inflation and loses credibility for b of e

Creates unsustainable bubbles in bonds and stock markets

Decrease interest rates for private investors of bonds

Increases inflation which also loses credibility of b of e

60
Q

Forward guidance started in

A

2013

61
Q

Why was forward guidance used

A

To show increase in bank rate snot imminent

62
Q

Why did forward guidance back fire

A

Because initially it was too specific and forecasting variables in the future is very difficult and thus their predictions were wrong

63
Q

What did this back fire for forward guidance result in

A

Decrease in forward guidance and made it very vague

Thus b of e further lost credibility

64
Q

What explains largest variation in imbalances and financial markets

A

Monetary shocks

65
Q

What affects probability of boom or bust

A

Short term interest rates or mortgage market deregulation

66
Q

What are high cost boom related too

A

Looser monetary policy

67
Q

What is problem with inflation and boom

A

Interest rates to narrowly focused on inflation can cause booms

68
Q

Why is tailoring monetary policy good for certain areas

A

Irish interest rate would have been 6.5% higher and this would have reduced House prices by 25-30% before housing bust

69
Q

What has driven recent high inflation

A

Volatile energy prices and supply chain issues from covid

Very expansive monetary and fiscal policies to prevent economy collapsing

And increase in central bank money due to QE

70
Q

What has caused household financial struggles

A

Increased mortgages and cost of living

71
Q

How many owner occupied homes will receive an increase rate

A

4 million

72
Q

What does fpc judge about banks and why is this contradictory

A

Banks are resilient and are able to lend if things worsen

However banks are tightening lending as risk has increased which is slowing growth

73
Q

Why inflation high after war

A

Monetary financing for war

74
Q

What was introduced in 80s to decrease inflation

A

Monetary targeting

75
Q

Succes of monetary targeting

A

Unknown as other countries with other strategies achieved lower interest rates

76
Q

PROBLEMS WITH CORPERATE LOANS

A

70 percent of corporate loans are floating interest rate which is increasing the cost of borrowing

77
Q

What is inflation doing to saving

A

Increased saving ratio

Economic policy (3 decks)

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