A Monetary Policy Primer, Part 7: Monetary Control, Then

It ’s high time that I got ‘round to the subject of “monetary control,” meaning the various procedures and devices the Fed and other central banks employ in their attempts to regulate the overall availability of liquid assets, and through it the general course of spending, prices, and employmen t, in the economies they oversee.In addressing this important subject, I ’m especially anxious to disabuse my readers of the popular, but mistaken, belief — and it is popular, not only among non-experts, but also among economists — that monetary control is mainly, if not entirely, a matter of central banks’ “setting” one or more interest rates.  As I hope to show, although there is a grain of truth to this perspective, a grain is all  the truth there is to it. The deeper truth is that “monetary control” is fundamentally about controlling the quantity of (hang on to your hats) … money! In particular, it is about altering the supply of (and, in re cent years, the demand for) “base” money, meaning (once again) the sum of outstanding Federal Reserve notes and depository institutions’ deposit balances at the Fed.Although radical changes to the Fed ’s monetary control procedures since the recent crisis don’t alter this fundamental truth about monetary control, they do make it impractical to address the Fed’s control procedures both before and since the crisis within the space of a single blog entry.  Instead, I plan to limit myself here to describing ...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs