Monetary policy has three major tools: open market operations , deposit reserve ratio (ie minimum reserve) requirements, and central bank discount window .
[ Edit ] Monetary base
The central bank directly regulates thetotal amountof currency circulating in the economy through open market operations -buying and selling bonds in exchange for hard currency . Note that bonds operated on the open market are only a small part of the bond market, so the central bank cannot change interest rates .
Open market business. The so-called "open market operation" (also known as "open market operation") refers to the central bank's public buying and selling of securities in the financial market in order to change the reserves of commercial banks and other deposit currency institutions, thereby affecting the money supply And interest rates, a monetary policy tool to achieve monetary policy goals.
[ Edit ] Deposit Reserve Rate (Required Reserve Rate)
Referred to as RRR, the financial regulations of various countries clearly stipulate that commercial banks must deposit part of the deposits they receive in the central bank. The ratio of this part of the funds to the total deposits is the deposit reserve ratio. When the central bank increases the deposit reserve ratio, the currency in circulation will shrink exponentially. The reasoning here is not difficult to understand: as commercial banks pay more reserves to the central bank, they have less funds at their disposal. As a result, banks’ loans to companies decrease, and companies’ deposits in banks are correspondingly smaller. "Loans" are declining, and the total amount of money in the entire society is greatly reduced. This is very similar to our tuning audio-reduce the power of the amplifier, the output volume will naturally decrease. Conversely, if the central bank lowers the deposit reserve ratio, the amount of currency in circulation will increase exponentially.
[ Edit ] Discount window lending
As the "bank of the bank", the central bank acts as the lender of last resort. In other words, commercial banks are shy in their pockets, and they often have to ask the central bank for loans. Borrowing money is not an empty glove, you have to pay something. When an enterprise asks for a loan from a commercial bank, it often transfers unexpired commercial paper to the bank to obtain a loan, which is called discounting. Commercial banks follow the law and transfer their commercial bills to the central bank, which is called rediscounting. When the central bank accepts commercial bank bills, they must discount the original price. The discount rate is the rediscount rate. Obviously, the central bank changes the rediscount rate, which is equivalent to increasing or reducing the loan cost of commercial banks, and its enthusiasm for credit expansion will increase, and the money supply will shrink or expand accordingly.