Posts Tagged money
Bond Fundamentals – Monetary Policy and Fiscal Policy
It’s the Federal Reserve Bank that influences the money supply. Three tools are used to implement monetary policy:
- Open Market Operations
- Discount Rates
- Reserve Requirements
Since open market operations is the tool used most, we will cover it. Here’s how it works: When the economy is growing too fast and the Fed is worried about the inflation rate, it will sell government securities from its portfolio to the open market. This decreases bank reserves, which means the money supply decreases. When there are less bank and businesses have to pay the bank more in order to borrow. This discourages consumers and businesses from borrowing. Less borrowing means less spending, which slows the economy and eventually can reduce price pressures.
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Do Monetary Handcuffs Restrain Leviathan? Fiscal Policy in Extreme Exchange Rate Regimes
This paper studies fiscal policy in countries that have chosen an extreme monetary stance. We think of a country as having an extreme monetary policy if it is in either a currency board or a common currency area. In much of our analysis, we distinguish between multilateral currency unions (such as the East Caribbean Currency Area, or ECCA) and countries that have unilaterally adopted the currency of an anchor country (such as Panama).
It is possible to motivate our analysis in several ways. A number of countries are considering whether to abandon national monetary sovereignty and unilaterally adopt the money of another country, including Mexico and Argentina; Ecuador, Guatemala, and El Salvador are already proceeding with dollarization. In Europe, 12 countries have already abandoned national monetary discretion within the Economic and Monetary Union (EMU). More generally, there has been much discussion of the “disappearing center” of exchange rate regimes; countries are said to have a choice of either freely floating or going to an extreme monetary stance.
Tags: Associate, countries, currency, economic, economic and monetary union, exchange rate, exchange rate regime, exchange rate regimes, exchange rates, fiscal, fiscal policies, fiscal policy, fixed exchange rate, fixed exchange rates, government, Import, inflation, models, monetary, monetary policy, monetary union, money, Special, StudiesRelated posts
