4 ms·
Nothing in your quote contradict what I said. Note that the Central Bank is not targeting the monetary base, but the interest rate.
by RobertoG 7y ago
Nothing in your quote contradict what I said. Note that the Central Bank is not targeting the monetary base, but the interest rate.
- benj111 7y agoThey target the interest rate through the monetary base. It is a means to an end. If you don't feel that quote clarifies feel free to read the rest of the section on monetary policy instruments.
- RobertoG 7y agoWhen they target the interest rate through the monetary base, they lost control of the monetary base. In other words, if they target the interest rate they can't control the monetary base, so, Central Banks don't control the quantity of money in the economy. If they choose to target the quantity of money in the economy, the tool that they have to use is the interest rate. So, they would lost control over the interest rate. Modern central banks target the interest rate: they sacrifice control over the monetary base. The central bank don't decide the quantity of money in the economy, they decide the interest rate. The implication is that they have to cover any necessary reserves by the private banks if they want to keep the interest rate in its target. So, yes, private banks create money when they lend and destroy money when the money is returned. And that's OK because that means that the quantity of money adapts to the activity of the economy.
- JumpCrisscross 7y ago> They target the interest rate through the monetary base This is correct. (The Fed has other tools beside open market operations, however, including directly manipulating rates on reserves and the discount rate.) But monetary base != money supply. The Fed manipulates rates to effect changes on the money supply.