Chapter 15 Monetary Policy

I. The Demand for Money
II. Monetary Policy
III. Effectiveness
IV. Application
V. Implementing Monetary Policy
VI. Modern Monetary Policy 
VII. QE2 Keeps Money Loose Readings
FED vs. ECB
The Fed's Unwritten Mandate: Liquidity at all Costs

Macro Review 14-18

7/5/24  Please Share!   

I. The Demand for Money is  D_m= D_t + D_a 
     A. The demand for money, D_m= D_t + D_t 
             D₁ results because people hold money, often in a money
               market account, to use as a medium of exchange.
          D₂  results because people accumulate money, often held
                in an investment account,to buy assets and other needs
          For more information visit Demand for Money - Wiki
      B. Affecting the non-investment components of aggregate demand
          C + I + G + X_N
         1. Lower interest rates  increase C, G, and X_N
             a. Consumption increases as credit purchases become cheaper.

             b. Refinancing existing debt at lower interest rates by individuals,
                 businesses,and governments frees funds for spending.

             c. Lower interest rates also decrease the international value of
                 the dollar as investors buy (demand) other currencies to earn
                 more interest. The lower dollar increases X_N as U.S. goods are
                 less expensive and foreign goods more expensive.

         2. Higher interest rates have an opposite affect

         3. Currency Exchange Rates and Economic Activity
             
             a. Value of a currency determines price of import and export goods
             
             b. Increase in money supply cause inflation lowering the value of
                 currency making exports cheaper and imports more expensive.
             
             c. Exports increase as they are less expensive in real terms
                 and imports decrease as conversion to yen makes Toyota's
                 more expensive
             
      C. Readings
          1. A  strong Dollar is Always Good Except When It  Isn't. 1/24/15
          2. U.S Government's Problem With a Strong High Valued Dollar 2/5/15
          3. A Brief History of U S Dollar Debasement 1/8/13
    

 .       Summary: Monetary Policy is the regulation of the money supply
                                 to affect interest rates which economic growth.

See Bubbles Credit And Their Consequences

II. Monetary Policy   

   A. Prelude: A History of US Banking

   C. Types of monetary policy
           1. Quantitative controls affect the money supply.
                a. Required Reserve Ratio
                    1. Lowering the reserve ratio creates excess reserves which banks may loan as newly created money. This is expansionary.
                    2. Raising the reserve ratio eliminates excess reserve so banks can not renew loans removing money and causing a contraction.
                b. Open-market operations
                    1. Buying and selling of U.S. government bonds by the Fed from banks or in the open market to change excess reserves affecting M1 supply
                        and interest rates is the primary tool.
                    2. Buying bonds is expansionary.
                       a) When buying from banks, the Federal Reserve pays with reserves providing excess reserves banks can loan as demand deposits.
                       b) When buying in the open market, increased demand from the Federal Reserve pushes up prices sellers receive, lowering the effective
                           interest sellers pay.
                    3. Selling bonds contracts the economy.
                    4. Review of Valuing bonds
                        a) Suppose you buy a twenty year, $10,000 bond paying 5% per year at face value of $10,000. Face value is called par value.
                            1) A few years go by and you need money and one choice is to sell the bond.
                            2) If interest rates on this type bond have gone down, people will be very anxious to buy, demand, will be high pushing price up
                               and your will receive more than $10,000.
                            3) If rate shave gone down, no one will give you $10,000, demand will be low, so if you need the money, you will sell for less, below par.
                            4) You can hold for twenty years and get par and get the money some where else.
                         b) Therefore, interest rates and bond values (prices) go in the opposite direction, if interest rates down, old bond price up because they are
                             at the old higher rate.
                         c) This is called the interest rate risk for bonds. Other risks have to do with issuer default and monetary inflation.
                     5. It is the most powerful of the four tools.
            c. Discount rate
                1. This is the rate charged by the Federal Reserve for loans to member banks.  
                2. It strongly affects the prime interest rate paid by a bank's best customers.
                   a) Lower the rate to expand economy as interest rates decrease.
                   b) Raise the rate to contract economy as interest rates increase.
                   c) Another important interest rate is the federal funds rate which is the rate at which banks loan funds to each other. 
              d. Term Auction Facility
                   1. Initiated in 2007, it allows banks to add to their reserves at low rates.
                   2. Done to increase bank liquidity which was low because of a loss in reserve caused by a housing crisis. f. Federal reserve balance sheet. 
 

      2. Qualitative controls affect the actions of market participants.
             a. Moral suasion or jawboning  
                 1. This social pressure by influential people to encourage specific people
                      to act in the public interest.
                 2. It is used to influence public opinion and political attitudes.
                 3. An example is when the Chairman of Board of Governors makes his
                     Semiannual Report to Congress on the economy and monetary policy.
             b. Margin Requirements, the down payment required on stocks which is
                  now 50%, is seldom changed.
             c. Consumer Credit Controls credit cards work so well they are seldom used.
             d. The Federal Funds Rate
           1. Most controllable interest rate
                 2. Targeted by monetary policy
                 3. It is the overnight interest rate banks with excess fed reserve charge
                     each banks short of fed reserve to keep the system in balance.
                 4. By controlling reserves, the fed controls this rate.
                 5. This allows them some control over short-term rates.
                 6. For more information visit Federal funds rate - Wikipedia
                 7. Taylor rule affected by Fed's  QE policies. 2/3/14
                     . Taylor rule would have kept millions out of work (Minneapolis Fed) 1/17
                     b A Taylor Rule for Public Debt

IV. Application

   
                 
         B. Adjusting to The Great Recession
             a. How Fed Adjusted Tools to Combate Great Recession 1
             b. How Fed Adjusted Tools to Combate Great Recession 2

        C. Adjusting to the Covid Shutdown Give Money Away

    V. Implementing Monetary Policy

              A. Elements Of Monetary Policy Implementation Framework 1 of 4
           B. Counterparties And Collateral Requirements Of Implementing Monetary Policy 2 of 4
           C. How Do Central Bank Balance Sheets Change In Times Of Crisis Part 3 of 4
           D. The Trouble With Macroeconomics centers on the failures of monetary policy
           F. The Long-Forgotten “M”
           E. FED answers fiscal policy questions
              1. What is the money supply? Is it important?
              2. What are the Federal Reserve's objectives in conducting monetary policy?
              3. Why doesn't the FED just buy Treasury securities directly from the U.S. Treasury?
              4. Debt Monetization: Then And Now 4/14/18
            5. American Capitalism after the Volcker Shock

       F. General Reading
         a. The Brave New World of Monetary Policy SF FED explains
                     policy change resulting from the Great Recession 6/6/12
            b. The Post Keynesian View-of Monetary Policy 12/10/15
                 c. Are The Effects Of Monetary Policy Asymmetric? Richman Fed 3/12/17 I

   C. Euro Monetary Policy Failed
    D. The Coming War Between Trump & The Fed 8 min video review/preview 4/14/17
    E. Inflation Looming? Phillips Curve vs. Quantity Theory | Econbrowser 12/20
    G. Summary:
        Strengths: speedy, flexible, less political pressure, works well controlling inflation but with pain
        Weaknesses easy doesn't spur enough growth, velocity adjusts to counter reserve changes.
        Recent Effectiveness

Source

Learning tools from European Central Bank     
Monetary Policy Game from the
Inflation Island another learning tool from ECB.
Disagreement and  Monetary Policy 10/30/17
History
What Caused the Recession of 1937  Global Economic Intersection 8/212/13
Editors note: After WWI much of Europe inflation cause severe
apprehension that existed today.  The U.S. is apprehensive concerning high
persistent unemployment because of  the Great Depression of 1930's.
The Presidential Election Cycle Theory and the FED
1994 FED Pre-emptive Inflation Strike Drew Controversy
Action to Stop Past Recessions, NYT 1p
The New Monetary Accord No One’s Talking About
Recent Currency Manipulations 4/25/16
Today’s Source of Money Creation

       VI. Modern Monetary Policy
            A. Basics from Modern Monetary Theory
                 1. monetarily sovereign government is the monopoly supplier
                 2. government has an unlimited capacity to pay for the things
                 3. government has an unlimited ability to fund other sectors
                 4. insolvency and bankruptcy of this government is not possible
            B. Overview Modern Monetary Theory is an unconventional
            C. A new frontier for monetary policy with ample reserves

            C. Seven Deadly Innocent Frauds of Economic Policy - Warren Mosler pdf
                1. Lecture from W. Moster 62 min video
                2. Video Interview                              

Data Analysis

Real Rates Been Negative Many Times.

ECB Responded More Slowly Than FED

Treasury Using the FED Took on the Additional Debt

Wall Street's Brightest Minds Reveal the Most Important Charts in the World

It Has Been a While

Competition For Funds Will Be Intense

Will Inflation Follow

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