Chapter 14

Monetary Policy

Structure

Board of Governors (BOG)

    12 Federal Reserve District Banks (FRB)

    Federal Open Market Committee

    Advisory Committees

Regulatory Responsibilities

Member Banks (reserve requirements)

    Bank Holding Companies (supervision)

    International Operations (supervision)

    Bank Mergers (approval needed)

Other Responsibilities

Check Clearing

    Truth In Lending Act (Regulation Z)

    Federal Reserve Notes and Currency

    Treasury Transactions

How Banks Create Money

M1 (currency and checking)

    M2 (M1 plus insured savings)

    M3 (M2 plus uninsured savings)

Fractional Reserve System

    Required Reserves

    Excess Reserves

    Loans and Money Creation

    Money Multiplier

Monetary Policy Tools

Reserve Requirement

    Discount Rate

    Open Market Operations

    Margin Requirements

    Moral Suasion

    Selective Credit Controls

    Easy Money (Stimulate)             Tight Money (Slow Down)

Reserve Requirement Down           Reserve Requirement Up

    Discount Rate Down                      Discount Rate Up

Buy Securities                                Sell Securities   

Effects of Monetary Policy

Short-Run (interest rates and investment)

    Long-Run (money supply and prices)

    Real Interest Rates

Limitations of monetary policy

Lag Time

    Asymmetrical Effects

    Best for “fine-tuning”

    Less control over interest rates (deregulation)

    Global implications of monetary policy