MONET

ARY
What is monetary policy?

the process
by which the
monetary
authority of a
country controls
the supply of
money.
What for?
What for?
Expansionary Contractionary

Increases the total Expands the

supply of money in money supply
the economy more more slowly
rapidly than usual than usual or
even shrinks it.
 Problem Remedy Means
unemploym induce an Buy bonds
ent and expansion in in the open
deflation the supply market
of money,
and
therefore
spending,
by reducing
the interest
rate
 Problem Remedy Means
inflation induce a Sell bonds
contraction in the open
in the market
supply of
money, and
therefore
spending,
by
increasing
the interest
rate
 Open Market Operations

The buying and selling of government

securities by the Reserve Bank on secondary
markets
 OMOs aim to

manipulate the manipulate the control the total money

short term interest supply of base supply
rate money
How OMOs Work: Buying securities from commercial
bank

Fed/
Gives CB Increas
up Pays es
securiti the reserve
esBank bank s Bank
 How OMOs Work: Buying securities
from public

Fed/
Bank
Gives CB Deposit
up Pays s in Increas
securiti bank es
esPublic Public reserve
s
How OMOs Work: Selling securities to commercial
bank

Bank
Gives up Decreas
securitie Pays es
s reserves
Fed/C
Bank
B
How OMOs Work: Selling securities to public

Gives up
Public Decreas
securities Pays by es
check reserves
from
Fed/C bank Bank
B
Understanding The Reserve
Requirements

Required reserves
A certain fraction of
deposits that a
depository institution is
required to reserve.
Set by the central
bank

Affects the size of

loan that the bank
can offer
Required Reserve and Monetary
Policy
Required Reserve and Monetary
Policy
 Other tool:
Discount Rate

The interest rate charged

by Federal Reserve Banks
to depository institutions
on short-term loans.
Discount Rate in
Indonesia
Goals of Monetary Policy
E c o n o m ic
Price growth
stability High
t
employmen

Financ y in
ial b ilit n
marke Sta reig e
ts Interest r f o a ng
stabili a te ch ket
ty s ta b i lity x
e ar
m
 Nominal Anchor in Price
Stability Goal
Nominal anchor uses a certain
nominal variable which ties
down the price level.

For example: maintaining an

inflation rate between 2% - 4
% might be an anchor.
Time-Inconsistency Problem
This problem arises
because policy makers
are always tempted to
pursue monetary policy
that is more
expansionary because
it would boost
economic output.
 does not mean that
unemployment is at
zero

High Employment
 ensuring that
resources are not idle

Economic Growth
 crises can
interfere with
the main
function

Stability of Financial Markets

 fluctuations
can create
uncertainty in
economy
Interest-Rate Stability
 stability makes it
easier for businesses
to plan ahead
Stability in
Foreign Exchange
THANK YOU.