Loading presentation...

Present Remotely

Send the link below via email or IM

Copy

Present to your audience

Start remote presentation

  • Invited audience members will follow you as you navigate and present
  • People invited to a presentation do not need a Prezi account
  • This link expires 10 minutes after you close the presentation
  • A maximum of 30 users can follow your presentation
  • Learn more about this feature in our knowledge base article

Do you really want to delete this prezi?

Neither you, nor the coeditors you shared it with will be able to recover it again.

DeleteCancel

Make your likes visible on Facebook?

Connect your Facebook account to Prezi and let your likes appear on your timeline.
You can change this under Settings & Account at any time.

No, thanks

Modern Central Bank Operations 2016

No description
by

Scott Fullwiler

on 12 June 2016

Comments (0)

Please log in to add your comment.

Report abuse

Transcript of Modern Central Bank Operations 2016

Target Rate -.025%
1. Banks Use Reserve Balances to Settle Payments and Meet Reserve Requirements
2. Central Banks Have a Fundamental Obligation to Payments System Stability
3. The Money Multiplier Model Is Untenable in Practice
4. Central Bank Operations Accommodate Banks' Demand for Reserve Balances
5. Reserve Requirements Are Related to Interest Rate Targets, Not Money Supply Targets
6. Potential Deviations from the Central Bank's Target Rate Are Set by the Spread or Corridor
7. There Is No "Liquidity Effect" Involved in Target Rate Changes
8. Quantity of Reserve Balances Is Set by the Central Bank's Method of Interest Rate Maintenance
9. Central Bank Operations Do Not Create Net Financial Assets for the Non-Government Sector
10. Central Banks Can Set Interest Rates Because Reserve Balances Settle Payments
Real-World Banking 101
Money Multiplier Model

change MS = multiplier x change MB
Canada:

1. No RR

2. Desired ER = 0
No BoC Uncertainty About Balance Sheet
No Bank Uncertainty About End of Day Overdraft

3. Target Rate > Remuneration Rate
US, pre-Lehman

1. RR

2. Desired ER:
Fed Uncertainty About Balance Sheet
Fed Uncertainty About Demand for RBs
Banks Uncertainty About Ending Day in Overdraft
Large Overnight Overdraft Penalties

3. Target Rate > Remuneration Rate (=0%)
The Essence of Central Banking . . .
Demand for RBs
Interbank Rate
Target Rate
Penalty/Overdraft/Lending Rate
Remuneration Rate (IOR)
Demand for RBs
Interbank Rate
Target Rate
Penalty/Overdraft/Lending Rate
Remuneration Rate (IOR)
Assets
Liabilities & Capital
Claims on Domestic Government

Claims on Domestic Banks

Claims on Financial Institutions

Net Foreign Reserves

Other Assets
Currency in Circulation

Reserve Balances

Government Deposits

Central Bank Bills

Central Bank Capital
Demand for RBs
Penalty/Overdraft/Lending Rate
Remuneration Rate (IOR)
Demand for RBs
Interbank Rate
Target Rate
Penalty/Overdraft/Lending Rate
Remuneration Rate (IOR)
Demand for RBs
Interbank Rate
Target Rate
Penalty/Overdraft/Lending Rate
Remuneration Rate (IOR)
Canada's "Tunnel" or "Corridor" MoIRM
0
System Excess
System in Overdraft
Target Rate + 0.25%
ECB's "Tunnel" or "Corridor" MoIRM
Target Rate + 0.25%
Target Rate -.025%
Demand for RBs
Interbank Rate
Target Rate
Discount (Lending) Rate
Fed's Pre-2003 MoIRM
(pre-1984, 1984-1998, 1998-2003)
Target Rate -.025%
Demand for RBs
Interbank Rate
Target Rate
Penalty/Lending Rate
Fed's 2003-2008 MoIRM
Target Rate + 1%
Supply of RBs
Supply of RBs
Supply of RBs
The Special Case of the US Fed's MoIRM
With a govt deficit, either CB or Tsy must provide interest earning alternative to RBs in order for the CB to achieve a positive target rate
Demand for RBs
Interbank Rate
Penalty/Lending Rate
Remuneration Rate (IOR)
Fed's Post-Lehman MoIRM 2008-2015
IOR + 0.5%
Target Range
Supply of RBs
Demand for RBs
Interbank Rate
Penalty/Lending Rate
Bank of Japan's MoIRM During QE
Target Rate + 0.25%
Target Rate
Supply of RBs
0
Examples of the General Case for the MoIRM
Supply of RBs
With a govt deficit, either CB or Tsy must provide interest earning alternative to RBs in order for the CB to achieve a positive target rate
Demand for RBs
Interbank Rate
Target Rate
Penalty/Overdraft/Lending Rate
Remuneration Rate (IOR)
With a govt deficit, either CB or Tsy must provide interest earning alternative to RBs in order for the CB to achieve a positive target rate
Demand for RBs
Interbank Rate
Target Rate
Penalty/Overdraft/Lending Rate
Remuneration Rate (IOR)
Canada's "Tunnel" or "Corridor" MoIRM
0
System Excess
System in Overdraft
Target Rate + 0.25%
Target Rate -.025%
ECB's "Tunnel" or "Corridor" MoIRM
Target Rate + 0.25%
Target Rate -.025%
Supply of RBs
The General Case of No RR
Special Case--Adding RR
Special Case of the US
With a govt deficit, either CB or Tsy must provide interest earning alternative to RBs in order for the CB to achieve a positive target rate
Demand for RBs
Interbank Rate
Target Rate
Discount (Lending) Rate
Fed's Pre-2003 MoIRM
(pre-1984, 1984-1998, 1998-2003)
Target Rate -.025%
With a govt deficit, either CB or Tsy must provide interest earning alternative to RBs in order for the CB to achieve a positive target rate
Demand for RBs
Interbank Rate
Target Rate
Penalty/Lending Rate
Fed's 2003-2008 MoIRM
Target Rate + 1%
Supply of RBs
Supply of RBs
Recall . . .
by end of
maintenance period . . .
Width of Horizontal Portion Shrinks
As Maintenance Period Ends
What Determines Qty of RBs CB Must Provide?

1. RR vs. No RR

2. Desired ER
Buffer Against RR and Overdrafts
CBs Ability to Estimate Demand
CBs Ability to Offset Balance Sheet Changes

3. Target Rate vs. Remuneration Rate
Japan Under QE and US Post Lehman

1. RR

2. Target Rate = Remuneration Rate
Central Bank Operations
Scott T. Fullwiler
UMKC
Minsky Summer School
Levy Economics Institute
June 2016

Why Does It Matter?
Context:

Policy vs. Strategy vs.
Tactics
Liquidities
Helicopter Drops
Payments system is the general case but adding RR changes nothing
So . . .
1. Only direct target is an interest rate target
2. It's not about "short run vs. long run"
Source: Marc Lavoie
Quantitative Easing MoIRM
the endogenous nature of currency
With a govt deficit, either CB or Tsy must provide interest earning alternative to RBs in order for the CB to achieve a positive target rate
Demand for RBs
Interbank Rate
Penalty/Lending Rate
Remuneration Rate (IOR)
Fed's MoIRM Since 2015
IOR + 0.5%
Target Range
RRP Rate
With a govt deficit, either CB or Tsy must provide interest earning alternative to RBs in order for the CB to achieve a positive target rate
Demand for RBs
Interbank Rate
Penalty/Lending Rate
Remuneration Rate (IOR)
Fed's MoIRM Since 2015
IOR + 0.5%
Target Range
RRP Rate
Assets
Liabilities & Capital
Claims on Domestic Government

Claims on Domestic Banks

Claims on Financial Institutions

Net Foreign Reserves

Other Assets
Currency in Circulation

Reserve Balances

Government Deposits

Central Bank Bills

Central Bank Capital
Liabilities & Capital
Vault Cash

Reserve Balances

Securities

Loans

Other Assets
Deposits

Savings & Time Deposits

Money Market Borrowings

Long-Term Debt

Preferred Equity

Common Equity

Retained Earnings
Assets
Central Bank
Banks
Monetary Policy--
Setting & adjusting interest rates relative to the state of the economy
MONETARY STIMULUS REQUIRES MORE PRIVATE SPENDING OUT OF
EXISTING
INCOME TO "WORK"
Fiscal Policy--
Adjusting the quantity of net financial assets of the non-government sector relative to the state of the economy
FISCAL STIMULUS ENABLES MORE PRIVATE SPENDING OUT OF
MORE
INCOME
DEFINING FISCAL/MONETARY POLICIES BY FUNCTION
"MARKET" RATE?

"The costs of reserves, both intraday and overnight, are policy variables. Consequently, a market for reserves does not serve the traditional role of information aggregation and price discovery."

Antoine Martin and James McAndrews
New York Fed, 2008
Central Bank & Treasury
T-Bills Interbank Mkt Tsy Repos
Banks Primary Dealers
Other Money Markets (Eurodollars, Commercial Paper, Non-Tsy Repos, etc.)
Other Financial Institutions Non-Financial Corporations
HIERARCHY OF MONEY MARKETS
Do IOR and/or "Liquidity Traps" Stop QE?
Internal Inconsistencies
in the
Neoclassical View
Full transcript