Bài giảng MicroEconomics - Chapter 033 Interest Rates and Monetary Policy

Interest Rates and Monetary PolicyChapter 33McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter ObjectivesThe equilibrium interest rate and the market for moneyMonetary policyHow the Fed controls the Federal funds rate How monetary policy affects GDP and the price levelEffectiveness of monetary policy and its shortcomings33-2Interest RatesPrice paid for the use of moneyMany different interest ratesSpeak as if only one interest rateDetermined by money supply and money demand33-3Demand for MoneyWhy hold money?Transactions demand, D1Determined by nominal GDPIndependent of the interest rateAsset demand, D2Money as a store of valueVaries inversely with the interest rateTotal money demand, Dm33-4Demand for MoneyRate of interest, i percent107.552.50501001502005010015020050100150200250300Amount of moneydemanded(billions of dollars)Amount of moneydemanded(billions of dollars)Amount of moneydemanded and supplied(billions of dollars)=+(a)Transactionsdemand formoney, Dt(b)Assetdemand formoney, Da(c)Totaldemand formoney, Dmand supplyDtDaDmSm533-5Interest RatesEquilibrium interest rateChanges with shifts in money supply and money demandInterest rates and bond pricesInversely relatedBond pays fixed annual interest paymentLower bond price will raise the interest rate33-6Federal Reserve Balance SheetAssetsSecuritiesLoans to commercial banksLiabilitiesReserves of commercial banksTreasury depositsFederal Reserve Notes outstanding33-7SecuritiesLoans to Commercial BanksAll Other AssetsTotal Reserves of Commercial BanksTreasury DepositsFederal Reserve Notes (Outstanding)All Other Liabilities and Net WorthTotal February 14, 2008 (in Millions)AssetsLiabilities and Net WorthSource: Federal Reserve Statistical Release, H.4.1, February 14, 2008$713,36960,039111,689$885,097$ 11,3124,979778,93789,869$885,097Federal Reserve Balance Sheet33-8Central BanksReserve Bank of Australia (RBA)Bank of CanadaEuropean Central Bank (ECB)Bank of Japan (BOJ)Banco de Mexico (Mex Bank)Central Bank of RussiaSveriges RiksbankBank of EnglandFederal Reserve System (the “Fed”) (12 Regional Federal Reserve Banks)Australia:Canada:Euro Zone:Japan:Mexico:RussiaSweden:United Kingdom:United States:Selected Nations33-9Tools of Monetary PolicyOpen market operationsBuying and selling of government securities (or bonds)Commercial banks and the general publicUsed to influence the money supplyWhen the Fed sells securities, commercial bank reserves are reduced33-10Open Market OperationsNew Reserves$1000$5000Bank System LendingTotal Increase in the Money Supply, ($5,000)Fed buys $1,000 bond from a commercial bank$1000ExcessReserves33-11Open Market OperationsCheck is DepositedNew Reserves$1000Total Increase in the Money Supply, ($5000)Fed buys $1,000 bond from the public$200RequiredReserves$800ExcessReserves$1000InitialCheckableDeposit$4000Bank System Lending33-12Tools of Monetary PolicyThe reserve ratioChanges the money multiplierThe discount rateThe Fed as lender of last resortShort term loansTerm auction facilityIntroduced December 2007Banks bid for the right to borrow reserves33-13Tools of Monetary PolicyOpen market operations most importantReserve ratio last changed 1992Discount rate was a passive toolTerm auction facility is newGuaranteed amount lent by the FedAnonymous 33-14The Federal Funds RateRate charged by banks on overnight loansTargeted by the Federal ReserveFOMC conducts open market operations to achieve the targetDemand curve for Federal fundsSupply curve for Federal funds33-15The Federal Funds RateFederal Funds Rate, Percent3.5Quantity of ReservesDfSf34.04.5Sf1Sf2Qf3Qf1Qf2Using Open Market Operations33-16Monetary PolicyExpansionary monetary policyEconomy faces a recessionLower target for federal funds rateFed buys securities Expanded money supplyDownward pressure on other interest ratesContractionary monetary policy33-17Taylor RuleRule of thumb for tracking actual monetary policyFed has 2% target inflation rateIf real GDP = potential GDP and inflation is 2% then target federal funds rate is 4%Target varies as inflation and real GDP vary33-18Monetary PolicyAffect on real GDP and price levelCause-effect chainMarket for moneyInvestment and the interest rateInvestment and aggregate demandReal GDP and pricesExpansionary monetary policy Restrictive monetary policy33-19Monetary Policy and GDP10860Rate of Interest, i (Percent)Amount of moneydemanded and supplied(billions of dollars)Amount of investment (billions of dollars)Price LevelReal GDP(billions of dollars)Q1QfQ3$125$150$175$15$20$25P2P3Sm1Sm2Sm3DmIDAD1I=$15AD2I=$20AD3I=$25(a)The marketfor money(b)Investmentdemand(c)Equilibrium realGDP and thePrice levelAS33-20Expansionary Monetary PolicyProblem: unemployment and recessionFed buys bonds, lowers reserve ratio, lowers the discount rate, or increases reserve auctionsExcess reserves increaseFederal funds rate fallsMoney supply risesInterest rate fallsInvestment spending increasesAggregate demand increasesReal GDP risesCAUSE-EFFECT CHAIN33-21Restrictive Monetary PolicyProblem: inflationFed sells bonds, increases reserve ratio, increases the discount rate, or decreases reserve auctionsExcess reserves decreaseFederal funds rate risesMoney supply fallsInterest rate risesInvestment spending decreasesAggregate demand decreasesInflation declinesCAUSE-EFFECT CHAIN33-22Monetary PolicyAdvantages over fiscal policySpeed and flexibilityIsolation from political pressureRecent U.S. monetary policyProblems and complicationsRecognition lagOperational lag Cyclical asymmetry 33-23The Big PictureLevels ofOutput,Employment,Income, and PricesAggregateDemandAggregateSupplyInputResourcesWith PricesProductivitySourcesLegal-InstitutionalEnvironmentConsumption(Ca)Investment(Ig)Net ExportSpending(Xn)GovernmentSpending(G)33-24The Mortgage Debt CrisisHome mortgage default 2007Banks write off bad loansReserves reducedFed as lender of last resortTerm auction facilityFed lowered federal funds rateMortgage backed securities as a new innovationBad incentives33-25Key Termsmonetary policyinteresttransactions demandasset demandtotal demand for moneyopen-market operationsreserve ratiodiscount rateterm auction facilityFederal funds rateexpansionary monetary policyprime interest raterestrictive monetary policyTaylor rulecyclical asymmetrymortgage debt crisis33-26Next Chapter PreviewFinancial Economics33-27