ECO 1302 Lecture Notes - Lecture 53: Landing Vehicle Tracked, Overnight Rate, Best Response

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26 Dec 2017

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Target overnight rate = 2 percent + inflation rate + 0. 5*(inflation rate target. Figure 3: the synchronic evolution of short-term interest rates in canada, 2000- Figure 4: long term interest rates vs the overnight interest rate, 2000-2008. Figure 4. 5: cpi inflation rate and real overnight rate, canada, 1991-2014. Figure 5: the effect of real interest rates on real expenditures. The interest rate on deposits at the central bank is the rate of interest that banks receive on their deposits at the bank of canada as a result of the operation of the lvts. The bank rate is the interest rate charged to banks that still have negative. Lvts balances at the end of the day and therefore must borrow funds for one night from the bank of canada in order to settle with the lvts. The operating band is the zone of overnight rates between the bank rate and the interest rate on bank deposits at the central bank.

Related Questions

The Current State of the European Economy: By now, you are relatively familiar with recent economic events in the United States. But what about Europe? Write two paragraphs about the state of the economy in the Euro area over the past several years. What has happened to inflation, real GDP growth, and unemployment? What about key policy interest rate set by the European Central Bank (ECB)? [Hint: The ECB sets several key interest rates, including a âdeposit rateâ (the interest rate the ECB pays on deposits from banks) and a âlending rateâ (the interest rate it charges for overnight loans). All are useful and interesting. To keep us all on the same page, letâs look at the lending rate.] An extremely helpful resource for this exercise is the ECBâs Statistical Data Warehouse: http://sde.ecb.europa.eu. (You may find tit convenient to make a brief table of this data or even copy some of the ECBâs Graphs.)

13. As we observed in this chapter, central banks, rather than purposefully setting the level of the money supply, usually set a target level for a short-term interest rate by standing ready to lend or borrow whatever money people wish to hold at that interest rate. (When people need more money for a reason other than a change in $4,010 $570.3 $641.0 CHAPTER 15 Money, Interest Rates, and Exchange Rates 383 the interest rate, the money supply therefore expands, and it contracts when they wish to hold less.) a. Describe the problems that might arise if a central bank sets monetary policy by holding the market interest rate constant. (First, consider the flexible-price case, and ask yourself if you can find a unique equilibrium price level when the central bank simply gives people all the money they wish to hold at the pegged interest rate. Then consider the sticky-price case.) b. Does the situation change if the central bank raises the interest rate when prices are high, according to a formula such as where a is a positive constant and a target price level? c. Suppose the central bankâs policy rule is where u is a random movement in the policy interest rate. In the overshooting model shown in Figure 15-12, describe how the economy would adjust to a permanent one-time unexpected fall in the random factor u, and say why. You can interpret the fall in u as an interest rate cut by the central bank, and therefore as an expansionary monetary action. Compare your story with the one depicted in Figure 15-13. Figure 15-12: http://gyazo.com/3d32377d42b5c9584e17b3c5e40aafaa

Figure 15-13: http://gyazo.com/1fa467e253e320f61da17532fa8d2b58

As we observed in this chapter, central banks, rather than purposefully setting the level of the money supply, usually set a target level for a short-term interest rate by standing ready to lend or borrow whatever money people wish to hold at that interest rate. (When people need more money for a reason other than a change in the interest rate, the money supply therefore expands, and it contracts when they wish to hold less.)

A. Describe the problems that might arise if a central bank sets monetary policy by holding the market interest rate constant. (First, consider the flexible-price case, and ask yourself if you can find a unique equilibrium price level when the central bank simply gives people all the money they wish to hold at the pegged interest rate. Then consider the sticky-price case.)

B. Does the situation change if the central bank raises the interest rate when prices are high, according to a formula such as R - R₀= a(P - P₀), where a is a positive constant and P₀a target price level?

C.Suppose the central bankâs policy rule is R - R₀= a(P - P₀) + u, where u is a random movement in the policy interest rate. In the overshooting model shown in Figure 15-12, describe how the economy would adjust to a permanent one-time unexpected fall in the random factor u, and say why. You can interpret the fall in u as an interest rate cut by the central bank, and therefore as an expansionary monetary action.

ECO 1302 Lecture Notes - Lecture 53: Landing Vehicle Tracked, Overnight Rate, Best Response

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