1. Copyright © 2000 Addison Wesley Longman Slide #8-1 Chapter Eight THE CONDUCT OF MONETARY POLICY: TOOLS, GOALS, AND TARGETS

2. Copyright © 2000 Addison Wesley Longman Slide #8-2 The Federal Reserve Balance Sheet Monetary Base = Currency + Reserves Open Market Purchase from Bank The Banking System The Fed Assets Liabilities Assets Liabilities Securities Securities Reserves - $100 + $100 + $100 Reserves + $100 Result: R  $100, MB  $100 Government security Discount loans Currency in circulation reserve 有賺利息 不支息 Note: reserve 包含銀行在央行的存款及 銀行持有的 currency ， CIC 不包含銀行持 的 currency Fed

3. Copyright © 2000 Addison Wesley Longman Slide #8-3 Open Market Purchase from Public Public The Fed Assets Liabilities Assets Liabilities Securities Securities Reserves - $100 + $100 +$100 Deposits + $100 Banking System Assets Liabilities Reserves Deposits + $100 + $100 Result: R  $100, MB  $100 The Federal Reserve Balance Sheet

4. Copyright © 2000 Addison Wesley Longman Slide #8-4 The Federal Reserve Balance Sheet Discount Loans Banking System The Fed Assets Liabilities Assets Liabilities Reserves Discount Discount Reserves + $100 loan + $100 loan + $100 + $100 Result: R  $100, MB  $100

5. Copyright © 2000 Addison Wesley Longman Slide #8-5 Market for Reserves and the Fed Funds Rate 1. Demand curve slopes down because i ff , ER  and R d up 2. Supply curve slopes up because i ff , DL , R s  3. Equilibrium i ff where R d = R s i ff   opportunity cost of holding ER  i ff  銀行較願 意向央行借 DL 再拆放給 同業，以賺取 較高的 i ff Reserve = required reserve + excess reserve

6. Copyright © 2000 Addison Wesley Longman Slide #8-6 Response to Open Market Operation or Change in Discount Rate 1. Open market purchase, R s shifts to right and i ff  2. i d , DL , R s shifts to right and i ff  ∴本張和上張投影片之結論： i ff  代表央採擴張貨幣政策 i ff 代表央行採緊縮貨幣政策

7. Copyright © 2000 Addison Wesley Longman Slide #8-7 Response to Change in Required Reserves 1. RR , R d shifts to right, i ff 

8. Copyright © 2000 Addison Wesley Longman Slide #8-8 Tools of Monetary Policy Open Market Operations 1. Dynamic: Meant to change Reserves 2. Defensive: Meant to offset other factors affecting Reserves, typically uses repos and reverse repos Advantages of Open Market Operations 1. Fed has complete control 2. Flexible and precise 3. Easily reversed: effect is reversed on the day the agreement matures 4. Implemented quickly

9. Copyright © 2000 Addison Wesley Longman Slide #8-9 Discount Loans Fed affects discount loan thru price (discount rate) and quantity 控制下面 3 種 quantity 3 Types 1. Adjustment Credit: easily obtained 2. Seasonal Credit 3. Extended Credit: more difficult to obtain Lender of Last Resort Function 1. To prevent banking panics: FDIC fund not big enough Examples: Continental Illinois and Franklin National Banks 2. To prevent nonbank financial panics Example: 1987 stock market crash Announcement Effect 1. Problem: False signals 給愈有 severe liquidity 需求之銀行 有代價有代價 也有代價也有代價 若央行決定進行 open market sales ( 緊縮貨幣政策 ) 之後 ，又宣布將提高 discount rate ，則外界可能解釋為加強 緊縮效果。但事實可能不是如此。因為 OMS 會使得 i ff  ， 若央行不及時提高 discount rate ，則銀行可能借 discount loan ，再以高的 i ff 貸放出去。

10. Copyright © 2000 Addison Wesley Longman Slide #8-10 Reserve Requirements Advantages 1. Powerful effect Disadvantages 1. Small changes have very large effect on M s 2. Raising causes liquidity problems for banks 3. Frequent changes cause uncertainty for banks 4. Tax on banks

11. Copyright © 2000 Addison Wesley Longman Slide #8-11 Goals of Monetary Policy Goals 1. High Employment 2. Economic Growth 3. Price Stability 4. Interest Rate Stability 5. Financial Market Stability 6. Foreign Exchange Market Stability Goals often in conflict Structural Frictional Natural rate of  高就業、高投資 + 高儲蓄 Supply-side economics 透過減稅 當景氣擴張、失業率降低時，常會造 成利率上升，通膨也上升。此時央行 若為了控制利率穩定而採降息措施， 則可能導致景氣過熱，通膨更高。但 若為了控制物價穩定，而讓利率繼續 上升，則可能導致短期內失業率上升 。

12. Copyright © 2000 Addison Wesley Longman Slide #8-12 Central Bank Strategy NBR=total reserve-borrowed reserve Discount loan MB- borrowed reserve Or T-bill rate

13. Copyright © 2000 Addison Wesley Longman Slide #8-13 Money Supply Target 1. M d fluctuates between M d' and M d'' 2. With M- target at M*, i fluctuates between i ' and i '' Monetary aggregate reserve aggregate

14. Copyright © 2000 Addison Wesley Longman Slide #8-14 Interest Rate Target 1. M d fluctuates between M d' and M d'' 2. To set i- target at i*, M s fluctuates between M ' and M '’

15. Copyright © 2000 Addison Wesley Longman Slide #8-15 Criteria for Choosing Targets Criteria for Intermediate Targets 1. Measurability 2. Controllability  利率比 monetary aggregate 較佳，但有名目利率的問題 3. Ability to predictably affect goals: open for debate Interest rates aren't clearly better than M s on criteria 1 and 2 because hard to measure and control real interest rates Criteria for Operating Targets Same criteria as above Reserve aggregates and interest rates about equal on criteria 1 and 2. But for 3, if monetary aggregate is used as the intermediate target then reserve aggregate is better used as the operating target.  quick and accurate measurement ，似乎利率比 monetary aggregate 較佳，但有名目利率的問題

16. Copyright © 2000 Addison Wesley Longman Slide #8-16 History of Fed Policy Procedures Early Years: Discounting as Primary Tool 1. Real bills doctrine 2. Rise in discount rates in 1920: recession 1920-21 Discovery of Open Market Operations 1. Made discovery when purchased bonds to get income in 1920s Great Depression 1. Failure to prevent bank failures 2. Result: sharp drop in M s 只要銀行拿著貸款客戶開立的 票據來央行 discount window ， 央行就會借錢給該銀行，因為 這些錢會是 for production use To lower the inflation 當時央行認為 bank failure 只是大恐慌 的產物，而非原因之一。

17. Copyright © 2000 Addison Wesley Longman Slide #8-17 Pegging of Interest Rates: 1942-51 1. To help finance war, T-bill at 3/8%, T-bond at 2 1/2% 2. Fed-Treasury Accord in March 1951 以 Money Market Conditions: 1950s and 60s 1. Free reserves = ER - DL 2. Interest rates History of Fed Policy Procedures 每當利率有上升壓力時， Fed 就作 OMP ，使利率不會上升，但會導 致 M  及通膨  為目標 當 FR , 表示 money market condition 越寬鬆 所以應作 open market sales ，以降低 free reserve 為何要減去 ? Short-term

18. Copyright © 2000 Addison Wesley Longman Slide #8-18 History of Fed Policy Procedures Targeting Monetary Aggregates: 1970s 1. Fed funds rate as operating target with narrow band 2. Procyclical M s New Operating Procedures: 1979-82 1. Deemphasis on fed funds rate 2. Nonborrowed reserves operating target 3. Fed still using interest rates to affect economy and inflation Deemphasis of Monetary Aggregates: 1982 -Early 1990s 1. Borrowed Reserves (DL) operating target Intermediate 但事實上 with broad band 控制利率為目標，就會使 M s 變來變去 M I 所以這段期間 i ff 變化加大 ，但 M s 變化卻也加大，原 因是央行並未認真執行。 當景氣擴張時，利率上升，則銀行會較有意願來借 DL ，這時央行 為了控制 DL ，就必須作 OMP ，使利率下降 所以以控制 DL 為目 標，就會使利率較穩 定

19. Copyright © 2000 Addison Wesley Longman Slide #8-19 Federal Funds Rate and Money Growth Before and After October 1979

20. Copyright © 2000 Addison Wesley Longman Slide #8-20 Fed Funds Targeting Again :1990’s and beyond 1. Fed funds target now announced International Considerations 1. M  in 1985 to lower exchange rate, M  in 1987 to raise it 2. International policy coordination History of Fed Policy Procedures 以提升美國出口

21. Copyright © 2000 Addison Wesley Longman Slide #8-21 Monetary Targeting Abroad United Kingdom 1. Targets M3 and later M0 2. Problems of M as monetary indicator Canada 1. Targets M1 till 1982, then abandons it 2. 1988: declining π targets, M2 as guide Germany 1. Targets central bank money, then M3 in 1988 2. Allows growth outside target for 2-3 years, but then reverses overshoots 3. 1990s: dilemma of restrain π, but keep exchange rate in EMS (European Monetary System)

22. Copyright © 2000 Addison Wesley Longman Slide #8-22 Japan 1. Forecasts M2 + CDs 2. Innovation and deregulation makes less useful as monetary indicator 3. High money growth 1987-89: "bubble economy", then tight money policy Monetary Targeting Abroad 定期公告

23. Copyright © 2000 Addison Wesley Longman Slide #8-23 Inflation Targeting Lessons from Monetary Targeting 1. Success requires correcting overshoots 2. Operating procedures not critical 3. Breakdown of relationship between M and goals made M-targeting untenable: Led to inflation targeting Inflation Targeting: New Zealand, U.K., Canada 1. Announcement of numerical π goal 2. Commitment to price stability 3. Communication with "Inflation Report" Lessons from Inflation Targeting 1. Decline in π still led to output loss 2. Worked to keep π low 3. Kept π in public eye: reduced political pressures for inflationary policy

24. Copyright © 2000 Addison Wesley Longman Slide #8-24 Using a Fed Watcher Fed watcher predicts monetary tightening, i  1.Acquire funds at current low i 2.Buy $ in FX market Fed watcher predict monetary loosening, i  1.Make loans now at high i 2.Buy bonds, price rise in future 3.Sell $ in FX market