User:Nick Gardner /Sandbox: Difference between revisions

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<ref>[http://www.federalreserve.gov/generalinfo/faq/faqfomc.htm ''Federal Open Market Committee: Frequently Asked Questions'', Federal Reserve Board, 2009]</ref>
<ref>[http://www.federalreserve.gov/generalinfo/faq/faqfomc.htm ''Federal Open Market Committee: Frequently Asked Questions'', Federal Reserve Board, 2009]</ref>


<ref>[http://www.stanford.edu/~johntayl/Papers/Discretion.PDF John Taylor: ''Discretion Versus Policy Rules in Public Policy'', Elsevier Science Publishers, 1993]</ref>
 


The mechanism to move the market towards a 'target rate' (whichever specific rate is used) is generally to lend money or borrow money in theoretically unlimited quantities, until the targeted market rate is sufficiently close to the target. Central banks may do so by lending money to and borrowing money from (taking deposits from) a limited number of qualified banks, or by purchasing and selling bonds.
The mechanism to move the market towards a 'target rate' (whichever specific rate is used) is generally to lend money or borrow money in theoretically unlimited quantities, until the targeted market rate is sufficiently close to the target. Central banks may do so by lending money to and borrowing money from (taking deposits from) a limited number of qualified banks, or by purchasing and selling bonds.
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[edit] Open market operations
[edit] Open market operations


Open market operations
Through open market operations, a central bank influences the money supply in an economy directly. Each time it buys securities, exchanging money for the security, it raises the money supply. Conversely, selling of securities lowers the money supply. Buying of securities thus amounts to printing new money while lowering supply of the specific security.
The main open market operations are:
* Temporary lending of money for collateral securities ("Reverse Operations" or "repurchase operations", otherwise known as the "repo" market). These operations are carried out on a regular basis, where fixed maturity loans (of 1 week and 1 month for the ECB) are auctioned off.
* Buying or selling securities ("direct operations") on ad-hoc basis.
* Foreign exchange operations such as forex swaps.


All of these interventions can also influence the foreign exchange market and thus the exchange rate. For example the People's Bank of China and the Bank of Japan have on occasion bought several hundred billions of U.S. Treasuries, presumably in order to stop the decline of the U.S. dollar versus the renminbi and the yen.
Open market operations--purchases and sales of U.S. Treasury and federal agency securities--are the Federal Reserve's principal tool for implementing monetary policy. The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). This objective can be a desired quantity of reserves or a desired price (the federal funds rate). The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.


The Federal Reserve's objective for open market operations has varied over the years. During the 1980s, the focus gradually shifted toward attaining a specified level of the federal funds rate, a process that was largely complete by the end of the decade. Beginning in 1994, the FOMC began announcing changes in its policy stance, and in 1995 it began to explicitly state its target level for the federal funds rate. Since February 2000, the statement issued by the FOMC shortly after each of its meetings usually has included the Committee's assessment of the risks to the attainment of it




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Revision as of 10:19, 26 November 2009

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The mechanism to move the market towards a 'target rate' (whichever specific rate is used) is generally to lend money or borrow money in theoretically unlimited quantities, until the targeted market rate is sufficiently close to the target. Central banks may do so by lending money to and borrowing money from (taking deposits from) a limited number of qualified banks, or by purchasing and selling bonds.

A typical central bank has several interest rates or monetary policy tools it can set to influence markets.

  • Marginal lending rate (currently 1.75% in the Eurozone) – a fixed rate for institutions to borrow money from the central bank. (In the USA this is called the discount rate).
  • Main refinancing rate (1.00% in the Eurozone) – the publicly visible interest rate the central bank announces. It is also known as minimum bid rate and serves as a bidding floor for refinancing loans. (In the USA this is called the federal funds rate).
  • Deposit rate (0.25% in the Eurozone) – the rate parties receive for deposits at the central bank.

These rates directly affect the rates in the money market, the market for short term loans.

[edit] Open market operations



  1. ↑ Monetary Policy Framework, Bank of England, 2009
  2. ↑ Arzu Çetinkaya and' Devrim Yavuz'Calculation of the Output-Inflation Sacrifice Ratio: The Case of Turkey, The Central Bank of the Republic of Turkey, October 2002
  3. ↑ Laurence Boone and Benoit Mojon: Sacrifice Ratio in Europe: A Comparison of France, Germany, Italy and the U.K., (Available at SSRN) 1999
  4. ↑ Laurence Ball: What Determines the Sacrifice Ratio?, National Bureau of Economic Research, 1994
  5. ↑ Robert E. Keleher: Transparency and Federal Reserve Monetary Policy , United States Congress Joint Economic Committee, November 1997
  6. ↑ Federal Open Market Committee: Frequently Asked Questions, Federal Reserve Board, 2009
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