University:
Kentucky State University
Course:
ECO 411 | Money and Banking
Academic year:

2022
Views:

104

Pages:

9
Author:

Maverick Martin

Tool 4: Negative Interest Rates on Reserves • Central banks can charge banks for depositing their funds (i.e. set negative interest rate) • Encourages banks to lend more & buy more securities • Sweden first implemented this in July 2009 – Denmark (July 2012), ECB (June 2014), Switzerland (December 2014), and Japan (January 2016) Monetary Policy Tools of the Federal Reserve • Federal Funds Rate • Open Market Operations • Discount Lending • Required Reserves • Interest on Reserves The Federal Funds Rate • The Fed’s lending of reserves to banks is called discount window lending • The interest rate charged banks for these loans is called the discount rate • The primary indicator of the stance of monetary policy in the United States is the federal funds rate, the interest rate on overnight loans of reserves (known as federal funds ) that banks trade among themselves FIGURE 16-13 Equilibrium in the Market for Reserves in the United States Equilibrium occurs at the intersection of the supply curve Rs and the demand curve Rd at point 1 and an interest rate of i*ff. FIGURE 16-14 Response to an Open Market Operation An open market purchase increases nonborrowed reserves, and hence the reserves supplied, and shifts the supply curve from Rs1 to Rs2. In panel (a), the equilibrium moves from point 1 to point 2, lowering the federal funds rate from to i1ff to i2ff. In panel (b), the equilibrium moves from point 1 to point 2, but the federal funds rate remains unchanged, i1ff = i2ff = ier. FIGURE 16-15 Response to a Change in the Discount Rate In panel (a), when the discount rate is lowered by the Fed from i1d to i2d, the horizontal section of the supply curve falls, as in Rs2, and the equilibrium federal funds rate remains unchanged at i1ff. In panel (b), when the discount rate is lowered by the Fed from i1d to i2d, the horizontal section of the supply curve Rs2 falls, and the equilibrium federal funds rate falls from i1ff to i2ff as borrowed reserves increase. FIGURE 16-16 Response to a Change in Required Reserves When the Fed raises reserve requirements, required reserves increase, which raises the demand for reserves. The demand curve shifts from Rd1 to Rd2, the equilibrium moves from point 1 to point 2, and the federal fund rate rises from i1ff to i2ff. FIGURE 16-17 Response to a Change in the Interest Rate on Reserves In panel (a), when the equilibrium federal funds rate is above the interest rate paid on reserves, a rise in the interest rate on reserves from i1er to i2er raises the horizontal section of the demand curve, as in Rd1, but the equilibrium federal funds rate remains unchanged at i1ff. In panel (b), when the equilibrium federal funds rate is equal to the interest rate paid on reserves, a rise in the interest rate on reserves from i1er to i2er raises the equilibrium federal funds rate to i1ff = i1er to i2ff = i2er. Monetary Policy Tools of the European Central Bank • Open market operations – Main refinancing operations – Longer-term refinancing operations • Lending to banks – Marginal lending facility/marginal lending rate – Deposit facility • Reserve Requirements – 2% of the total amount of checking deposits and other short-term deposits – Pays interest on those deposits so cost of complying is low

Chapter 16 Tools of Monetary Policy Part 5

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