Instruments of Monetary Policy:

These methods target money supply growth rate...

Open market operations: Achieved by buying and selling government treasury bills. Gilt repos are also used, a gilt sale and repurchase agreement.

Buying and selling securities in the financial market: This affects the monetary base (quantity of notes and coins in circulation). If government prints new money to purchase securities, then monetary base will increase

Reserve ratios: In some countries , banks are required to hold a certain fraction of their deposits as cash reserves, and central bank can influence money supply. If reserve ratio is raised, then banks reduce their lending, so money supply is reduced.

Discount rate: The rate charged to commercial banks when they want to borrow money from the central bank. Raising discount rate above general market interest rate, means it becomes more expensive for commercial banks to borrow.

Most of these methods have been abandoned by countries in the developed world. Now most central banks have committees that meet regularly to decide what interest rates should be set at to ensure country's inflation rate meets government target. Any changes in interest rate should affect demand, which will in turn keep inflation in check. Now focused on Interest rates to control demand as opposed to focus on money supply growth rate.

	Created by dekanola almost 13 years ago

university Global Banking Note on Revision Notes, created by dekanola on 09/12/2013.