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Monetary Policy (Role of central banks (Banker for government, Banker for…
Monetary Policy
Role of central banks
Banker for government
Banker for commercial banks
Regulator of commercial banks
Conducting monetary policy
Advantages
Relatively quick implementation
Ability to adjust interest rates incrementally
No budget burden on government
CB less susceptible to political pressure
Limitations
Time lag
Possible ineffectiveness in recession (low consumer/business confidence)
Conflict between govt objectives (eg. price stability vs trade balance)
Inability to deal with supply-side policies
CB manipulating size of money supply (Ir)
Changing required reserve ratio (lend out more/less)
Change discount rate
Interest rate at which commercial banks borrow from CB
Conduct open market operations (buy/sell bonds)