MAF202 Lecture Notes - Lecture 7: Nominal Interest Rate, Official Cash Rate, Financial Instrument
Document Summary
Week 7: government debt, monetary policy and the payments system. Governments need to fund capital and recurrent expenditures. This is achieved by issuing debt securities in the money and capital markets. Fiscal policy relates to the annual incomes and expenditures of a government. Monetary policy affects the level of short term interest rates by adjusting the level of financial system liquidity. To finance budget deficits (gov expd > gov revenue) Retire debt at/prior to maturity if budget in surplus. Government intends to issue about billion of treasury bonds each year to ensure a deep and liquid market. Crowding out effect: government demand for debt financing reduces the amount of funds available for investment in the private sector, minimised in times of strong fiscal management (e. g. budget surplus) Like the private sector, the government issues both coupon and discount securities. Treasury bonds (or t-bonds) for full financial year financing. Treasury notes (or t-notes) for within year or intra year financing.
