Kap. 4

Central bank wants to make a credible announcement today but tomorrow central bank has incentive to deviate from it

-> e.g. central bank promises low inflation rate -> households believe it -> set prices/ wages accordingly -> later central bank is tempted to adapt a more expansionary policy to boost outpot and employment in the short-term

-> Conclusion: Households be aware of this incentive -> anticipation of higher inflation from the beginning

1. measurement errors

2. downward nominal rigidities in wages

3. deflation risk worse than inflation risk

4. greater room for monetary policy -> Fisher Relation

1. primary objective is to maintain price stability, secondly other economic policy objectives (e.g. high level of employment)

2. inflation target is 2% over the medium-term

3. ECB interest rates remain primary monetary policy instrument

4. Clear defined integrated anayltical framework

1. Dual Mandate -> Maximum/full employment & price stability

2. 2% avg. inflation target -> widely interpretation of avg. 2% target (uncertainty may de-anchor inflation expectations)

3. Full employment objective is only persued asymmetrically -> only negative deviations are countered (unless overemployment -> undesired rise in inlation)

4. FED is not that clear about pillars of its analysis -> usage of multi indicator approach

1. open market operations -> FED buys or sells assets to change the supply of non-borrowed reserves (normally outright operations vs. repo)

2. Discount lending policy

   1. Primary credit -> backup liquidity to sound banks (like marginal lending facility)

   2. Secondary credit -> for commercial banks with liquidity problems

   3. Seasonal credit

3. Minimum Reserve Requirements

4. Interest Rate on Reserves (ior)

1. Main Refinancing operations -> short-term collateral loans to commercial banks (Managing reserves R)

2. Longer-term Refinancing operations -> medium-term collateral loans to commercial banks

3. 2 standing facilities -> marginal lending facility iml & deposit facility ir

4. Minimum reserve requirement -> commercial banks are required to hold reserves to their liabilities (Min. reserve guarantees sustained demand for reserves)

market where commercial banks can trade the central bank Reserves R among themselves

1. Comparision of medium-term inflation rate forecast with inflation target

2. if it differs -> instruments to change inflation rate

central bank controls money market interest rate i by adjusting the supply of reserves R

money market interest rate is adjusted by the deposit facility rate iR

-> no precise control of reserve levels necessary