TAILIEUCHUNG - Lecture Money, banking, and financial markets: Chapter 18 - Stephen G. Cecchetti, Kermit L. Schoenholtz

Chapter 18 - Monetary policy: Stabilizing the domestic economy. In this chapter, students will be able to understand: The Federal Reserve has four conventional monetary policy tools, the European Central Bank's primary objective is price stability, monetary policymakers use several tools to meet their objectives, the Taylor rule is a simple equation that describes movements in the federal funds rate,. | Chapter Eighteen 18- Introduction There are three interest rates: The federal funds rate, The discount rate, and The deposit rate. These are the primary tools of monetary policy during normal times. In a financial crisis, central banks may also adjust the size and composition of their balance sheet. 18- Introduction Interest rates play a central role in all of our lives. They are the cost of borrowing and the reward for lending. Higher rates restrict growth of credit. The business press is constantly speculating about whether the FOMC will change its target. 18- Introduction Between September 2007 and December 2008, the FOMC lowered its target for the federal funds rate 10 times. This was the first time since the 1930s that the Fed hit the zero bound on the nominal federal funds rate. Banks can always hold cash paying zero interest. They will never choose to lend their reserves at a negative nominal rate. The nominal policy rate therefore faces a zero bound:

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• Interest rate derivative markets
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• Term structure affect interest rates
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