Session 7: Macro

Heterodox policy: Would heterodox monetary policies promote or impede economic growth?

2013: shift in three major central banks (USA, Japan, UK)  new policy: doves

I) A. Orthodox Methods

Changing interest rates
Open-market operations
Changing reserve requirement: keep percentage of reserve in banks

“Now with short term interest rates will stuck near zero….”

B. Quantitative easing

Lowering exchange of the interest rate when banks exchange with other banks
Long-term bonds
Reach new equilibrium

II) A. Positive consequences

Bigger output  lower unemployment
Housing market
Devaluation of currency  competiveness
Higher inflation in the future  higher demand at the moment (Keynes; when prices rise, people consume so demand increases)
Smaller fluctuation of business cycle (greater growth)
B. Negative consequences

Speculation (financial bubble)
Pension schemes in the UK
Long run inflation (more money chasing the same amount of goods)
Dependence of governments

Difficult to measure effects (we do not know what would have happened without policies)

Bonds: debts payed by the government; buying bonds = lending money to the government

Bank protects POLICY INTEREST RATE: savings in house to lend money
Interest rate paid to refinance loan is the price you pay for overproviding loans: creation of more money than the bank should have and have to borrow more money from other banks.
If none can’t be found to clear account, you can go directly to the central bank: policy rate
If central bank increases interest rate: day to day basis, more costly to create more credits comparing to the money in the deposit  less loans, more aggressive  direct impact on all of the banks and the interest they have in the economy

CENTRAL BANK CONTROLS AMOUNT OF MONEY THROUGH INTEREST RATE

Disinflation: reducing the inflation rate
Deflation: decrease in price (10% in deflation, lowering)