Money. Credit. Banks. Tools and methods of monetary policy (lecture notes)

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Money. Credit. Banks. Tools and methods of monetary policy (lecture notes)

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Instruments and methods of monetary policy

By monetary policy instruments, economists understand the operations and methods by which the Central Bank can change bank reserves, the money supply and the volume of lending to the economy.

Tools:1) Open market operations. They represent the purchase and sale of securities by the central bank. The sale will lead to a reduction in the money supply. It is considered the most effective instrument of monetary policy. There are 2 types of transactions: direct transactions (i.e. with immediate delivery) and repo transactions (meaning the purchase of securities with an obligation to buy them back after a certain period). By type, open market operations are divided into dynamic (aimed at changing the level of bank reserves and the monetary base) and protective (aimed at maintaining the stability of the financial system in the event of an unexpected deviation).

2) Refinancing of banks. An increase in refinancing volumes increases the volume of borrowed reserves in the banking system, the monetary base and the money supply. The Central Bank can influence the volume of refinancing in two ways: - influencing the interest rate on loans (the rate increases - the cost of Central Bank loans increases - the volume of borrowing decreases);

▪ influencing the amount of loans at a given interest rate using a refinancing policy. Refinancing policy affects lending volumes by issuing loans and involves the central bank setting goals. Conditions and terms of lending.

Refinancing is used as a tool to stabilize the banking system (providing additional reserves during a crisis). Refinancing policy has less direct impact on the monetary sphere

3) Reserve requirements. The Central Bank has the right to require banks to keep reserves in a certain proportion to deposits. A decrease in the reserve rate increases the multiplier and the corresponding money supply (and vice versa). An increase in the required reserve ratio limits the ability of banks to lend to the economy, since it requires holding a larger volume of liquid funds relative to deposits.

4) Deposit operations - attracting free funds from banks into time deposits of the Bank of Russia. Designed to sterilize free banking liquidity. They are carried out in 2 ways: on fixed terms or on auction terms. Such operations “bind” excess reserves of banks, restraining the growth of the money supply.

5) Direct quantitative restrictions - establishing limits on the refinancing of banks and other credit organizations and conducting certain banking operations.

Stabilization monetary policy.

The monetary policy of the Central Bank is an integral part of the economic policy of the state. It is a system of measures to achieve the main economic goals: economic growth, high employment, price stability, stability of the interest rate and the exchange rate of the national currency. Intermediate goals (what the Central Bank can control to achieve the main goals): money supply, nominal interest rate, nominal GDP, exchange rate. Criteria for selecting intermediate targets: - speed of measurement and availability of information about the parameter; - the possibility of control and management using the tools of the Central Bank; - Consistency and predictability of impact on ultimate goals. Operational targets (a set of variables that the Central Bank can directly influence): bank reserves. Monetary base, interbank market rates, etc. Now the concept of price stability as the main goal of monetary policy has become widespread because:

1) the stability of the general price level and the absence of inflation and deflation makes it possible to observe relative prices => the market will allocate resources more efficiently;

2) Creation of incentives for investment (because there is less risk);

3) Less resources are diverted from productive use for hedging (insurance) of inflationary risk;

4) elimination of inflationary costs associated with the distorting effect of the tax system on economic behavior;

5) Prevents arbitrary redistribution of wealth.

The Bank of Russia switched to a policy of price stabilization, announcing the ultimate goal of reducing inflation and keeping it at a low level. Quantitative characteristics of price stability: general consumer price index, core inflation indicator (goods and services whose prices are regulated by the government and goods and services subject to seasonal price fluctuations are excluded from the CPI calculation set). Core inflation is that part of inflation that the Central Bank can directly influence. Achieving a certain core inflation target can serve as an assessment of the effectiveness of monetary policy. The transmission mechanism of monetary policy is the process of the impact of political decisions on the economy as a whole and on the price level in particular.

Strategies for conducting monetary policy:

1. monetary targeting (the Central Bank maintains the specified parameters for changing the money supply);

2. direct inflation targeting (the reaction of the Central Bank to deviations of inflation forecast values from the set values on a certain time horizon);

3. Exchange rate targeting (fixing at a given level by adjusting interest rates and the monetary base).

Author: Shevchuk D.A.

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