Reactions to global financial crisis

What are targeting regimes in the world?

- Inflation targeting regime - Inflation targeting regime with prevailing rates close to 0% - mixed targeting regime - exchange rate targeting regime

Give example of country with inflation targeting regime

Russia, most of the Europe, Brazil

Give example of country with inflation targeting regime with prevailing rates close to 0%

UK, USA, Canada

Give example of country with mixed targeting regime

China, Kazakhstan, Indonesia

Give example of country with exchange rate targeting regime.

Denmark, Bulgaria, Venezuela

What is the active approach?

the bank conducts action on its initiative

What is the passive approach?

basically means that market participants may totally on their discretion choose to exchange any amounts of currency through available fixed exchange rate. Such approach is based on the assumption that rational market players will want to exhaust the opportunity to make gain or avoid loss and will exchange the currency until it reaches the equilibrium of the fixed peg.

What in theory don't do banks with exchange rate targeting?

do not try to influence the inner economy by any means except for the FX interventions.

What are the most common interventions by currency?

sale of USD, than purchase of USD

What is Repurchase Agreement (repo)?

The Fed purchases US government securities will an agreement that the seller will buy them back (repurchase them) at a specified price on a specified date, usually within two weeks. A repo is therefore like a temporary open market purchase, temporarily increasing the monetary base.

What is matched sale-purchase transaction (reverse repo)?

The Fed sells US government securities with an agreement that the buyer will sell them back at a specified price on a specified date, again usually within two weeks. A reverse repo is therefore like a temporary open market sale, temporarily decreasing the monetary base.

What are the advantages of open market operations?

They are under the direct and complete control of the Fed; They can be large or small; They can be easily reversed; They can be implemented quickly

How can Fed can affect the volume of discount loans?

by setting the discount rate

What happens when the discount rate is higher

A higher discount rate makes discount borrowing less attractive to banks and will therefore reduce the volume of discount loans.

What happens when the discount rate is lower?

A lower discount rate makes discount borrowing more attractive to banks and will therefore increase the volume of discount loans.

What is the advantage of discount loan?

They allow the Fed to act as a lender of last resort during a financial panic.

Disadvantages of using discount loans as a tool for monetary policy during normal times:

The volume of discount loans can be influenced by the Fed, but not completely controlled: The Fed cannot be sure how many banks will request discount loans at any given interest rate. Changes in the discount rate must be proposed by the Federal Reserve Banks before being approved by the Board of Governors. Hence, they are neither quickly made nor easily reversed.

disadvantages of changes in reserve requirements

Large changes in reserves must be approved by Congress. Hence, large changes cannot be made quickly and easily. Also, if a bank holds only a small amount of excess reserves and the required reserve ratio is increased, the bank will have to quickly acquire reserves by borrowing, selling securities, or reducing its loans. Each of these three options is costly and disruptive. Hence, changes in reserve requirements can cause problems for banks by making liquidity management more difficult.