The Fed's Monetary PolicyCaToolbox4.Operational Policy atthe European CentralBankMinimum Bid Rate (Target Refinancing rate)Marginal Lending Facility100 basis points above target refinancing rateReserveRequirements.2%appliedtocheckingaccountsOvernight CashRate(likemarket FedFunds Rate)21-11
21-11 The Fed’s Monetary Policy Toolbox • 4. Operational Policy at the European Central Bank • Minimum Bid Rate (Target Refinancing rate) • Marginal Lending Facility • 100 basis points above target refinancing rate • Reserve Requirements • 2% applied to checking accounts • Overnight Cash Rate (like market Fed Funds Rate)
The Fed's Monetary Policy0ToolboxFigure18.3Euro-AreaOvernight CashRate and ECB InterestRates,January1999-June2004MarginalLendingRate65OvernightCashRateDepositRateTargetRefinancingRateO200020012002200320041999
21-12 The Fed’s Monetary Policy Toolbox
12.2Linking Tools toC0Objectives1.DesirableFeatures of a Policy Instrument（1)Easilyobservablebyeveryone(2) Controllable and quickly changed(3) Tightly linked to the policymakersobjectives21-13
21-13 12.2 Linking Tools to Objectives 1. Desirable Features of a Policy Instrument • （1）Easily observable by everyone • （2）Controllable and quickly changed • （3）Tightly linked to the policymakers’ objectives
Linking Tools toObjectivesOFigure18.4The MarketforBank Reserves whentheFedTargets the Quantity of ReservesReserve targetsWhentheFedtargetsthequantityofreserves,ashift inreservedemandmake interestcauses themarketfederalfundsrateto move.Anincreaseinreservedemand forces the interest rate up,while a fall in reserve demand forces therates volatile.interestratedown.ReserveSupplyIncreaseinFall inReserveReserveDemandDemandReserveDemandTargetQuantityofReservesQuantity21-14
21-14 Linking Tools to Objectives Reserve targets make interest rates volatile
Linking Tools to ObjectivesO2. Targets and InstrumentsOperating InstrumentsInterestratesorMonetarybaseIntermediate targetsMonetary Aggregates (M1,M2)ObjectivesLow Inflation,Growth,stable interestrates21-15
21-15 Linking Tools to Objectives 2. Targets and Instruments • Operating Instruments • Interest rates or Monetary base • Intermediate targets • Monetary Aggregates (M1 , M2) • Objectives • Low Inflation, Growth, stable interest rates