Bài giảng Financial Markets - Lecture 14: Monetary Policy

Lecture 14: Monetary PolicyBank of England 1694Granted monopoly on joint stock banking by Parliament in return for war loans.Not an invention of economists, started off as a powerful bank that was able to demand that other banks held deposits in it.Did not have government monopoly on note issue, but achieved it through its monopoly power.Banks of the United StatesLoosely modeled after Bank of EnglandFirst Bank of the United States 1791-1811, was promoted by Alexander HamiltonSecond Bank of the United States 1816-1836. President Andrew Jackson called it a “dangerous monopoly,” conflict with Nicholas Biddle, president.Suffolk System, MassachusettsNineteenth Century Problems and SolutionsPrivately issued bank notesDiscounts on notesBanking panics associated with business depressionsNational Banking System, 1863, mostly ended panics until 1907.1907 panic saved by J. P. MorganUnder National Banking System inflexible money supply, strongly seasonal interest rateLed to creation of Federal ReserveFederal Reserve System - 1913Created flexible money supply, responding to business situationFed was lender of last resort12 Regional banks, each presides over a district.Two in MissouriBoard of Governors in Washington DCBoard of Governors7 members, 14-year termsChairman has 4-year term. Traditional power of the chairmanIndependent of executive and legislative branch. An “independent central bank.”Chairman must make semiannual monetary policy reports (Humphrey Hawkins)Banking Panic of 1933Despite Fed’s lending, a banking panic forced Roosevelt to declare a banking holidayLed to establishment of Federal Deposit Insurance Company (FDIC) opened doors in 1934, funded by premia paid by banksNo U. S. panics sinceEuropean Central BankFounded 1998Eurozone members and non Eurozone membersHad to construct Eurozone data for first timePresident Jean-Claude Trichet since 2003Otmar IssingNew Euro CurrencyCurrency first issued January 1, 2002“The parallel lines [in €] “represent the stability of the euro.”Bank of JapanToshihiko Fukui, Governor since 2003Interest rates have been brought down virtually to zeroPurchase of government bonds to try to stimulate economyProposals to buy foreign bonds, dollarsJapanese banks sitting on unlent fundsNikkei Index Monthly 1984-I to 2004-IIMonetary Problem in JapanInflation often negativeGensaki rate zeroReal rate often substantial, Bank of Japan can do nothingSvensson proposal to peg yen at, say, 160 to dollar, unheeded by conservative B of JReserve RequirementsDepository Institutions Deregulation and Monetary Control Act of 1980: 12% reserves on demand deposits, 3% on timeAct allows Fed to change reserve requirements, on demand deposits within range 8% and 14%.Banks must meet requirements over two-week statement periodReserves are in cash or balances with federal reserve. FedwireFOMCFederal Reserve Board, President of New York Fed, and four other reserve bank presidents.Meets roughly once a monthSince 1994, has made immediate announcements of policy decisionSince 1997 has made immediate announcements of federal funds rate targetTrading Desk, FRBNYBuys and sells Treasury billsAugust 1999 FOMC gave desk authorization to trade in mortgage-backed securitiesFOMC is studying allowing desk to trade in debt of states, or foreign countries.Discount Rate and Federal Funds RateDiscount rate is rate on loans Fed makes to member banks.Borrowing is a privilege, not a rightFederal funds rate is rate of interest banks pay to each other when they lend excess reserves.Repo rate is collateralized, hence tends to be a little lower.Changed Definition of Discount RatePrior to 2003, discount rate was usually 50 basis points lower than the funds rateThen, borrowing at discount window carried stigmaOn Jan 9, 2003, Fed raised discount rate above funds rate, eliminating stigmaPrimary discount rate (sound banks) about 100 basis points above funds rateSecondary discount rate (banks that do not qualify) 50 points above primary discount rateFederal Funds Rate and Inflation Rate Monthly 1954-VII to 2004-IReal Federal Funds Rate Monthly 1954-VII to 2004-IStabilization and 1980 and 1981-2 RecessionsNew Fed Chairman Paul Volcker thought inflation had gotten out of hand.Created “the great recession” that stopped inflationMany foreign countries similar experienceStabilization and 1990-1991 recessionFed was misled by inaccurate GDP numbers, didn’t see recession coming.First started cutting interest rates Dec. 1990, after recession had been on for six monthsThe 2001 RecessionNot brought on by rising interest rates to curb inflationary pressureA post-stock-market bubble recessionDramatic cuts in rates starting early 2001Recession short lived (March-November)Housing boom started by rate cuts