Central Banks and the Federal Reserve System参考.ppt

Chapter 15 Tools of Monetary Policy Tools of Monetary Policy Open market operations Affect the quantity of reserves and the monetary base Changes in borrowed reserves Affect the monetary base Changes in reserve requirements Affect the money multiplier Federal funds rate: the interest rate on overnight loans of reserves from one bank to another Primary instrument of monetary policy Demand in the Market for Reserves What happens to the quantity of reserves demanded by banks, holding everything else constant, as the federal funds rate changes? Excess reserves are insurance against deposit outflows The cost of holding these is the interest rate that could have been earned minus the interest rate that is paid on these reserves, ier Demand in the Market for Reserves Since the fall of 2008 the Fed has paid interest on reserves at a level that is set at a fixed amount below the federal funds rate target. When the federal funds rate is above the rate paid on excess reserves, ier, as the federal funds rate decreases, the opportunity cost of holding excess reserves falls and the quantity of reserves demanded rises Downward sloping demand curve that becomes flat (infinitely elastic) at ier Supply in the Market for Reserves Two components: non-borrowed and borrowed reserves Cost of borrowing from the Fed is the discount rate Borrowing from the Fed is a substitute for borrowing from other banks If iff id, then banks will not borrow from the Fed and borrowed reserves are zero The supply curve will be vertical As iff rises above id, banks will borrow more and more at id, and re-lend at iff The supply curve is horizontal (perfectly elastic) at id FIGURE 1 Equilibrium in the Market for Reserves Affecting the Federal Funds Rate Effects of open an market operation depends on whether the supply curve initially intersects the demand curve in its downward sloped section versus its flat section. An open market purchase causes the federal funds rate to fall whereas an open market sale