bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

350 MONETARY ECONOMICS
Key concepts usd in this chapter
liquidity
equation of exchange
Quantity Theory of Money
velocity of circulation
capital risk aversion
domestic credit expansion
leaning into the wind
Duke of York tactic
special deposits
Supplementary Special Deposits
Further questions and exercises
Medium Term Financial
Strategy (MTFS)
overfunding
off-balance-sheet operations
risk-asset ratios
securitization
monetary base control
inflation targeting
credibility
openness
1. Explain why policy makers have generally come to the conclusion that the
only effective instrument of monetary policy is the short-term rate of interest.
2. Outline the disadvantages of trying to limit the growth of money and credit
by ‘direct’ controls.
3. ‘It is not that the demand for lending has become less sensitive to changes
in relative interest rates. If anything, it has become more so. The problem lies
in the increasing inability of the authorities to cause changes in relative rates
by changing the level of absolute rates.’ (Goodhart, 1984). Explain how this
situation has come about.
4. Explain how central banks are able to set the level of short-term interest
rates.
5. Explain briefly why ‘credibility’ and ‘openness’ are desirable properties in
the conduct of monetary policy.