Monetary policy

M. Friedeman in 1956, View: Money is a substitute for all assets

Adv-noninflationary

BoE is responsible, MTFS(medium term)

1.     Interest rate policy-investments non-marginal, Gov. debt increases, hot money(I abroad), politically unpopular, people borrow anyway. Chancellor didnt raise interest in 95. Key is the base rate(Treasury bills, LDMA). Raising makes thru exchange rate Imp. cheap-lowers prices.

2.     Liquidity ratios - thru credit creation, controls investment, lowered in recession

Excess liquidity

Bank use securities as liquid assets

3.     Control of money supply-hard to determine, V changes.

a.     Direct cash balance effect (besides I).

b.     D for money is I inelastic

c.     Investment is I elastic

4.     Open-market operations (91Treasury), from BoE, creates new money. BoE tries to make banks short of money. Inflationary, but doesn't increase Nat. debt much.

5.     Funding-gilts, expensive, borrowing existing money from public

6.     The issue of notes and coins

7.     Special directives and deposits (damage relationships, effective)

8.     Moral suasion (in USA)

9.     EMU directives-convergence criteria

10.   exchange rate

policy targets (liquidity)

Intermediate targets(money stock-Mo6%, credit volume , interest(<4%), exchange, steady growth)

Velocity of Mo is steady 25 coz black economy grows in recession.

Overall - inflation, economic growth, unempl.

dD=(G-T)+(r-Y')D-dM

Change in M4=PSBR-debt sales+dLending to private

M Targets were exceeded(D for loans inelastic, hot money, hard to measure)