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1、Chapter18MonetaryPolicy:Stabilizingthe Domestic EconomyLearningObjectivesUnderstand...LO1FedandECBconventionalpolicytoolsLO2HowpolicytoolslinktoobjectivesLO3SimpleguidesforpolicysettingLO4UnconventionalpolicytoolsCentralbankershavealonglistofgoalsandashortlistoftoolsth
2、eycanusetoachievethem.Theyaresupposedtostabilizeprices,output,thefinancialsystem,exchangerates,andinterestrates,yettheonlyrealpowertheyhavecomesfromtheircontrolovertheirownbalancesheetandtheirmonopolyonthesupplyofcurrencyandre-serves.Toachievetheirgoals,policymakerscan
3、changethesizeofthemonetarybasebybuyingandsellingassets—primarilygovernmentsecuritiesinthecaseoftheFed—andbymakingloanstobanks.Theycanalsoalterthemixofassetstheyhold.Traditionally,centralbankschooseatargetforthemarketinterestrateonovernightinterbankloansandadjustthescal
4、eofthemonetarybasetohitthattarget.IntheUnitedStates,therateatwhichbanksmakeovernightloanstoeachotherisknownasthefederalfundsrate.Througha“channel”or“corridor”system,theFedlimitsthedeviationsofthemarketfederalfundsratefromthetargetbyadjustingtheratetheychargefordiscount
5、loanstobanksinneedoffunds(thediscountrate,whichsetsaceil-ingonthemarketfederalfundsrate)andtheratetheypayonreservesbanksholdatthecentralbank(thedepositrate,whichputsafloorunderthemarketfederalfundsrate).Thesethreeinterestrates—thefederalfundsrate,thediscountrate,andthe
6、depositrate—aretheprimarytoolsofmonetarypolicyduringnormaltimes.1However,whenkeymarketsdonotfunctionproperly,asinafinancialcrisis,orwhenpolicymakersjudgeconventionalinterestratepolicytobeinadequate,centralbanksalsomayadjustthesizeandcompositionoftheirbalancesheettoachi
7、evekeypolicygoals.Interestratesplayacentralroleinallofourlives.Theyarethecostofborrowingforthoseofuswhoneedresourcesandtherewardforlendingtothoseofuswithsavings.Higherinterestratestendtorestrictthegrowthofcredit,makingitharderforbusi-nessesandhouseholdstogetfinancingan
8、dforindividualstofindorkeepjobs.Little1Aswewillsee,theFedhasafourthconventionalpolicytool,reserverequirements,butthat
