CENTRAL BANKING

CENTRAL BANKS … HNB The Croatian National Bank (CNB) ECB The European Central Bank ECBS The European Central Bank System The Bank of England The Fed The Federal Reserve (System) …

Which words are defined below Which words are defined below? open-market operations, required reserve, discount rate The amount of funds that banks must hold in reserve against deposits made by their customers is called …. The rate at which the central bank lends money to commercial banks is called … The buying and selling of government securities in the market in order to increase or reduce the amount of money in the banking system is called …

Match the two columns: interest money required lender open-market monetary discount exchange policy rate operations reserve rates supply of last resort

Matchings: interest rates money supply required reserve open-market operations monetary policy discount rate exchange rate lender of last resort

Central banks are in charge of… ensuring, holding, implementing, providing, supervising, acting …monetary policy …price stability …the exchange rate (forex operations, FX) …commercial banks …as lender of last resort …bank reserves (required reserve) …currency (cash) to banks …loans to banks – discounting …as the government’s bank …as the bankers’ bank

Central banks are in charge of… implementing monetary policy ensuring price stability supervising the exchange rate (forex, FX operations) supervising commercial banks acting as lender of last resort holding bank reserves (required reserve) providing currency (cash) to banks providing loans to banks - discounting acting as the government’s bank acting as the bankers’ bank

Assignment: Read the extracts from Schiller’s Essentials of Economics (1996) and fill in the table: MONETARY POLICY PROBLEMS What has gone wrong? GOALS What should be done? MEASURES How should it be done? Expansionary (Loose) Restrictive (Tight)

Read the extracts from Schiller’s Essentials of Economics (RB: p Read the extracts from Schiller’s Essentials of Economics (RB: p.63) and fill in the table: MONET. POLICY PROBLEMS OBJECTIVES MEASURES Expans. Economy in recession (below its full-employment potential) To stimulate the economy: to increase borrowing & spending ↓ to encourage output Increasing the money supply: lowering the reserve requir. dropping the discount rate buying more bonds lowering interest rates easier approvals of loans Restr. Overheating economy (too much pressure on production capacity, rising prices) To cool the economy: to lessen loan availability →lower investments to reduce aggr. demand Reducing the money supply: -raising the reserve requir. - increase the discount rate - selling bonds - higher interest rates - less available loans

Loose or tight? Quantitative Easing‘ (QE) QE is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. QE targets commercial bank and private sector assets and attempts to spur economic growth by encouraging banks to lend money. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes. Read more about QE: http://www.investopedia.com/terms/q/quantitative-easing.asp