Tutorial: Economic Lyceum Topic: Economic State Policy Prepared by: Ing. Lenka Gabrielová Projekt Anglicky v odborných předmětech, CZ.1.07/1.3.09/ je spolufinancován Evropským sociálním fondem a státním rozpočtem České republiky.

T HE CENTRAL BANK TOOLS

Direct tools of monetary policy: They are mainly selective, direct, administratively difficult; therefore, they are used rarely and only temporarily. The advantage is that the central bank tools cannot be bypassed by commercial banks. By means of these tools the central bank affects their monetary base, money supply and stability of the banking sector.

Liquidity rules – the central bank sets obligatory structures of assets and liabilities of commercial banks ensuring their stability and thus the stability of the whole banking sector (e.g. capital appropriateness, share of deposits in the loans, etc.). Interest limits – the interest limits are minimal rate loans and minimal or maximal deposit rates. By means of these the central bank regulates size of savings in the economy, size of loans, money demand, etc. Credit limits –credit limits are absolute and relative limits

Mandatory deposits – a duty of some organizations is to keep accounts at the central bank, to carry out transactions or to save money (mostly public authorities – the central bank in the Czech Republic manages state budget accounts, state funds,…) Recommendations, challenges, gentlemen's agreements Recommendations – it is an oral expression of central bank wishes how the central bank should behave (e.g. when dealing with credit exposure) Challenges – they do not have to be in a written form, but they are much stronger. Gentlemen's agreements are in a written form and their form is binding

Indirect tools of monetary policy they are unaddressed and general. When they are used, they have to be in accordance with market access because they have wider influence.

Open market operations – these are the commonly used tools in the market of developed economies, mostly it includes purchase or sale of high quality securities (direct operations, reoperation) Discount tools- loans provided by the central bank to commercial banks and rates from these loans (loan discount, rediscount loans, lombard loan). Mandatory minimum reserves –it is a tool stabilizing the banking sector

Obligatory minimum reserves=it is a rate of obligatory minimum reserves set by the central bank = a percentage of non-bank deposits in commercial banks that must be saved at the central bank – mostly they are interest free Foreign exchange interventions – the aim is to maintain the optimal exchange rate (direct and indirect interventions)

By means of inflation targeting the central bank can reach more rational inflation expectations and also the central bank may influence the actual level of inflation expectations according to its purpose. The mechanism of inflation targeting – the central bank sets an objective that should be fulfilled and develops inflation prognosis. If the prognosis differs from the predetermined objective, the monetary tools have to be used.

How can the central bank affect the inflation rate in coming seasons? Do gentlemen's agreements and challenges belong to direct or indirect monetary policy tools?

Czech National Bank, available on WWW: HAMERNÍKOVÁ, B. a KUBÁTOVÁ, K.: Veřejné finance – učebnice, Eurolex Bohemia, Praha, 2000 SLANÝ, Antonín, ŽÁK, Milan: Hospodářská politika, Praha, C.H.Beck, 1999 VOSTROVSKÁ, Zdena, VORLÍČEK, Jan: Úvod do hospodářské a sociální politiky, Praha, VŠE, 2005